Let the Credit Card Reforms Begin

Many consumers who’ve experienced first-hand the high credit card interest fees and penalties we’ve all heard about lately would say that reform of the credit card industry is long overdue.  The most recent data indicates that revolving credit card debt in America now stands at $928 billion.  Although this is a decline from our peak of $977 billion, we still have a long way to go before we reign in our use of plastic.  The Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act, is Congress’s attempt to help. The CARD Act strengthens consumer protection in the credit card market by amending two existing pieces of legislation, the Truth in Lending and Fair Credit Reporting acts. Most of the CARD Act’s provisions take effect in February 2010, though some may begin sooner.

The new regulations would limit the circumstances in which creditors can raise rates, and will require lenders to give consumers 45 days notice of such increases.  This provision, which begins in late August of 2009, is good news for all of us, especially as it relates to universal default, which is the practice of raising interest rates based on your payment history with other creditors.  Although many lenders have already done away with universal default, the new regulation will discontinue the practice entirely.

Another issue that many of us experience with our credit cards has to do with due dates – something that most of us couldn’t imagine being a problem.  Unfortunately, due date sleight-of-hand has generated plenty of late fees for lenders in recent years. Here’s how it works: Let’s say that one of your creditors sends you a monthly bill with a due date of the 15th of the month. You send the payment at the last moment, but are relieved to be told by your postman that the payment will, indeed, arrive on the 15th.  Next month, you discover that you’ve been assessed a late fee. Why? Your particular lender requires that your payment arrive before 9am on the due date to be considered on time, even though they know that the mail isn’t delivered to their office until noon.  Under the CARD Act, this practice will also change, as regulators require that customers be given a reasonable amount of time to make payments.  Therefore, your payments would be due at least 21 days from the receipt of your monthly bill, and must be considered on time regardless of the time of day they are received.

Perhaps the most encouraging changes are those that affect the disclosures of credit card terms and conditions – you know, the fine print describing our rights and obligations that few of us can understand.  Under the new law, credit card applications, monthly statements and other materials would be required to clearly display terms in reader-friendly boxes with large type. In addition, creditors must also post their terms and condition on the Internet so consumers have continued access to the information. Furthermore, credit card issuers will have to disclose the consequences of making only minimum payments each month; essentially, the fact that doing so will take much longer to pay off your remaining balance and cost you substantially more in the long run.

A focal point of the legislation is to reduce the fees consumers are charged for various activities.  According to the White House, such penalties amount to $15 billion dollars in annual revenue to creditors.  In an effort to corral these fees, consumers will be required to opt-in to over-limit fees. Institutions will be required to obtain a consumer’s permission to process transactions that would cause the account to go over the limit.  If the consumer does not agree to such a stipulation, charges beyond the cardholder’s credit limit will be declined.

While these reforms are good news, there are some consequences to consider.  Many skeptics suspect that lenders will make other changes to maintain profitability.  Some experts believe that zero-percent balance transfer offers will be a thing of the past.  High annual fees, higher interest rates, and reduced credit limits could become commonplace.  We have already seen several lenders switch to a variable rate interest system.  A variable rate credit card is directly tied to a fluctuating index, often the prime rate. Thus, when the index increases, so does the interest rate of a variable rate card.  So, if a cardholder’s current interest rate was 12% and the index tied to the card rose by .5%, their new interest rate would be 12.5%.  There are many more provisions, and the following sites offer some fantastic explanations.

Whitehouse.gov

govtrack.us

For more information, or to speak with a certified credit counselor please contact Cambridge Credit Counseling at 800-897-2200 or www.cambridgecredit.org.

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