Credit Wise
(featured column)
What
the New Credit Card Law Means to You
by Jennifer
Wallis
Many people in
the financial industry are waiting for the other shoe to drop in response to the
credit card reform law that recently passed. Since it goes into effect in 2010,
many are speculating about how the credit card industry will respond to changes
that will most certainly impact their bottom line. If you are a consumer with
credit card debt, you may be feeling a little nervous and anxious about how the
law will affect you. Let's go over some of the changes. More...
While the law itself is designed to help
consumers, it remains to be seen how credit card companies will react between
now and when the law goes into effect in 2010. Some experts speculate that
credit card companies could raise current rates on consumers with a current
balance. Others say that consumers may start being charged annual fees as well
as interest at the time of purchase (instead of the usual grace period). Rewards
that many credit card customers enjoy such as rebates, frequent flier miles, etc.,
could also be reduced. At this point, we can only guess if those carrying
balances will have to start paying more in the coming months.
As consumers, we don’t have much control
over the response of the credit card companies. The law itself was designed to
protect consumers and help those especially that carry a balance.
Some changes are
:
Interest
rate increases
:
Credit card companies will not be allowed to raise your interest rate on an
existing balance unless a promotional rate ends (you received 0% for six months
and now your six months is up), if you have a variable interest rate (an
interest rate to is set by financial market conditions such as the prime rate),
or if you make a late payment. Once you make six consecutive on-time payments,
the interest rate must go back to the former rate. Also, credit card companies
must give you 45 days notice if they are making any significant changes to your
credit card agreement.
Universal
default
:
Many consumers don’t understand the nasty
little practice of universal default. It allows all of your credit card
companies to raise your interest rate if they determine you are a higher risk
than you once were. For example, let’s pretend that you’re struggling one
month. You can pay all of your credit cards except for that one Citibank card.
That one payment is going to be late but everyone else is paid on-time. The
credit card companies can review your credit report to see how you’re paying
all of your creditors. Let’s say that your other creditors, Bank of America
and Capital One see that you paid Citibank late-even though they were paid
on-time. Under the current universal default rules, they could also raise your
interest rates on their cards because you are now a higher risk. With the new
law, this practice will no longer be allowed.
Over the
limit fees
:
Consumers must now opt-in to pay over the
limit fees. If they do, purchases that put you over your credit limit may be
approved but you will be charged an over the limit fee for that. Otherwise, any
purchase that will send you over your credit limit will be declined.
Minimum
payments
:
Credit card companies must now disclose on
your monthly statement the consequences of paying only the minimum.
Specifically, they must tell you how long it will take to pay it off if you just
keep making minimum payments. Also, they must give you an idea of how much you
would need to pay if you would like to pay off your account in 12, 24, 36 and 48
months.
Highest
interest portion paid first
:
On your credit card statement,
you may have noticed that you are charged a different interest rate for
different things you charge. Cash advances typically have the highest interest
rate. Balance transfers may have the lowest and purchases typically fall
somewhere in the middle. Currently, if you make a payment larger than the
minimum, all of that extra will go towards the lowest interest portion of your
balance. The higher interest portion just sits there and draws interest every
month. Under the new law, any amount paid over the minimum will now be put
toward the highest interest portion of your balance instead.
No credit
cards under 21
:
Anyone under 21 must now either obtain a
co-signer for the card or must prove that they have the income to repay that
debt. Currently, on college campuses across the
US
, college kids can sign up for a credit card as they get their free t-shirt.
Unfortunately, financial issues are the #1 reason that kids drop out of
college. I am actually really excited about this
aspect of the law because I feel like it will give young people a better chance
to start off their lives without the burden of credit card debt.
Overall, I think it’s great to do away
with practices such as skyrocketing interest rates and universal default because
they really hit consumers when they are down. I am also especially excited
about the changes that allow young people to gain a little more financial
security before giving them a credit card. Honestly, it isn’t a great
time to be in credit card debt, just because the credit card companies are
struggling right now. While the law will provide some protections from
unfair practices- the best protection you can have is the one you give
yourself-becoming debt-free.
* * *
Copyright
© 2009 by Jennifer Wallis. All rights reserved.
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