Credit CARD Act Guide Part 2: Understanding Rate, Fee, and Clarity Changes
February 17, 2010
By: Curtis Arnold
American credit card customers enter a new era on February 22, 2010. That date marks the full enactment of the Credit CARD Act signed into law the previous spring. Bolstered by populist backlash against "bailed out" banks, lawmakers drafted some of the boldest, strictest regulations ever imposed on private lenders.
New Rules Ban "Unfair" Credit Card Rate Increases
Rapidly rising interest rates on consumer credit card accounts spurred Congress into action, especially after constituents complained of inexplicable changes to credit limits and interest rates. New regulations address three long-term complaints:
· Eliminating "any time, any reason." Under the CARD Act, banks may only change your interest on existing balances if you are 60 days or more late on your monthly minimum payment. In addition, if you make 6 months of on-time payments, banks must restore your original rate.
· No more universal default. One of the most controversial credit card trends of the last decade, among other things, "universal default" clauses allowed banks to impose penalty rates and fees whenever a third-party credit bureau reported a default with another lender.
· Promotional terms protection. The Credit CARD Act requires promotional rate periods to last at least six months and, with very few exceptions, forbids changes to the purchase rate of any new accounts within the first year.
By changing many existing customers' terms and conditions before the new rules take effect, banks have sought to circumvent the anticipated big negative impact the CARD Act is expected to have on their bottom line. On a related note, while Congress addressed whether banks can change interest rates over time, interest rates themselves can only be capped by state legislation. Most credit card issuers base their lending operations in states with no interest rate caps.
Regulations Ensure Credit Card Fee Fairness
After proposing tougher limits on changing credit card interest rates, some consumer advocates worried that banks would find other ways to extract charges from customers. Therefore, new regulation also imposes restrictions on the ways banks calculate finance charges and penalties:
· Consistent payment cycles. The Credit CARD Act mandates that statements be mailed or posted online no later than 21 days before an account's due date.
· Fair interest calculation. Lawmakers targeted banks that used "double-cycle billing" to inflate interest. Lenders must calculate interest based only on the balance during a single payment cycle.
· Overlimit charges become opt-in. Some credit card issuers expressed concern that banning overlimit transactions would cause embarrassment at the checkout counter. However, lawmakers asserted that consumers should have the right to decide that for themselves.
With the implementation of the new law just around the corner, some banks have already shifted profit centers to other fee sources. For instance, one major credit card issuer has implemented a $1 "statement fee," while others have increased charges for "expedited payments" online or by phone.
Credit Card Contract Terms Become Readable
Earlier rules required credit card issuers to publish the "Schumer Box," a simple grid of account terms that resembled the nutritional information charts on packaged foods. The Credit CARD Act takes that initiative even further, forcing major changes to statements and credit card applications.
· Plain language. New regulations mandate the size and typefaces used on credit card applications, statements, and account notices. Instead of "mice type" legal text printed along the sides or bottoms of account materials, banks must now use clear, readable language to explain products and services.
· Financial Consequences. Congress also challenged credit card issuers to educate consumers by including information about the impact of long-term debt in every account statement. Banks must now calculate how long customers could stay in debt by paying only minimum payments. They must also provide the payment amount necessary to meet a 36-month payoff goal.
Even with new restrictions in place, credit card issuers can still change many terms of any consumer account, provided they offer a written notice at least 45 days in advance. Cards issued to business entities instead of individuals bear no such protection. Fortunately, consumers will be given the opportunity to opt out of many negative account changes. The down side is that refusing to accept changes to terms and conditions usually entails closing your account. Lawmakers have already started debating new regulations that could address these issues and others in 2010 or 2011.
Related article: Credit CARD Act Guide Part 3: Subprime-So Long Fee Harvester Cards!
Related article: Credit CARD Act Guide Part 4: The Death of Free Checking?
About the Author
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of "How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line" (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).