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.

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Copyright © 2009 by Jennifer Wallis. All rights reserved.

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