Now a federal law to protect millions of consumers who rely on credit cards has taken effect, it signals a new era of managing credit.
The new normal for credit cards may be more transparent and easier to understand for everyday Americans. Credit card issuers and credit industry analysts say the new law makes credit cards more costly for all users and unaccessible for low-income families. Look for the return of routine annual fees, fewer rewards cards and the possibility that credit card bills will be payable immediately rather than after a monthlong grace period.
The new normal
The passage of the bill came swiftly, with the Senate May 19 and the House OKing it May 20 and President Barack Obama signing it May 22, 2009. (Read the act.) Then, most of the protections kicked in on Feb. 22, 2010, while still others will take effect in August of 2010.
What does the credit card law mean for cardholders? Millions of credit card users avoid retroactive interest rate increases on existing card balances and have more time to pay their monthly bills, greater advance notice of changes in credit card terms and fewer penalty fees, late charges and interest payments. The law also fundamentally changes the way credit card issuers market, bill and advertise credit cards.
Here are the highlights of the law:
Limited interest rate hikes: Interest rate hikes on existing balances are allowed only under limited conditions, such as when a promotional rate ends, there is a variable rate or if the cardholder makes a late payment. Interest rates on new credit card accounts cannot increase during the first year, except when a cardholder pays late. Significant changes in terms on accounts cannot occur without 45 days’ advance notice of the change.
No more universal default: “Universal default,” the practice of raising interest rates on customers based on their payment records with other unrelated credit issuers (such as utility companies and other creditors), has ended for existing card balances. However, card issuers can still raise rates in this manner on future card purchases as long as they give the consumer at least 45 days’ advance notice of the increase.
|At a glance: Proposed credit card law|
More time to pay monthly bills: Credit card issuers have to give card account holders “a reasonable amount of time” to make payments on monthly bills. That means payments are due at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or are moved up, giving them less time to pay their bills and increasing the likelihood of late fees.
Clearer due dates and times: Credit card issuers can no longer set early morning or other arbitrary deadlines for payments. Cut off times set before 5 p.m. on the payment due dates are illegal under the new law. Payments due at those times or on weekends, holidays or when the card issuer is closed for business are not subject to late fees.
Highest interest balances paid first: When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first. Previously, industry practice was to apply all amounts over the minimum monthly payments to the lowest-interest balances first — thus extending the time it takes to pay off higher-interest rate balances.
Limits on over-limit fees: Consumers must “opt in” to over-limit fees. Those who opt out will have their transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees charged for going over the limit must be reasonable.
No more double-cycle billing: Finance charges on outstanding credit card balances are computed based on purchases made in the current cycle rather than going back to the previous billing cycle to calculate interest charges. So-called two-cycle or double-cycle billing hurts consumers who pay off their balances, because they are hit with finance charges from the previous cycle even though they have paid the bill in full.
Subprime credit cards for people with bad credit: People who get subprime credit cards and are charged account-opening fees that eat up their available balances got some relief under the new law. These upfront fees cannot exceed 25 percent of the available credit limit in the first year of the card.
Minimum payments: Credit card issuers must disclose to cardholders the consequences of making only minimum payments each month, namely how long it would take to pay off the entire balance if users only made the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they want to pay off their balances in 36 months, including the amount of interest.
See related: Obama signs new credit card bill into law, A comprehensive guide to the new Credit CARD Act, What people are saying about the new credit card law, Interactive timeline: The road to credit card reform and future effective dates of the law, Annual fees return in credit card mail offers, Regulators issue sweeping new credit card rules, How to cope with credit cards until the new rules take effect, What the new credit card rules don’t cover, Interactive look at what new monthly credit card statements would disclose, Regulators will vote on new credit card rules, House passes Credit Cardholders’ Bill of Rights, Fed backs rules to curb deceptive credit card practices, Fed moves to close timing loophole in credit card payments, Senate banking chairman: Credit card reform on tap, Proposed credit card rule changes draw massive response, Obama will usher in credit card reform, observers say, House OKs Credit Cardholders’ Bill of Rights, New credit card rules don’t cover business, corporate credit cards, Feds: Close rate-hike loophole in new credit card rules, Have you been ‘rate-jacked’?