If you have a credit card, chances are you have been receiving a number of notices about your account. Now is an important time to be reading those notices because credit card companies have recently come under a variety of new rules, thanks to the Credit Card Accountability, Responsibility and Disclosure, or Credit CARD, Act of 2009.
Several measures included in the legislation are effective February 22, 2010, while other provisions kicked in last August. The legislation is designed to provide consumers with greater protection from fees and interest rate hikes, and it requires several changes in the information provided on monthly credit card statements.
Some of the key features of the legislation impact the following:
- Interest rate increases. Credit card issuers must give cardholders a minimum of 45-days notice before raising interest rates. Additionally, interest rates may not be raised during the first year the account is opened, and special introductory rates must last at least six months. Also, the increase in interest rates will affect only charges made after the date of the announced increase unless payments are more than 60 days late, special promotional rates have expired or the indexed variable rate outlined in the terms of the credit card increases. In other words, credit card issuers cannot raise interest rates on existing balances or purchases made before the new rate increase without just cause. However, they can raise interest rates on future purchases with the 45-day notice, and the legislation does not limit the amount of those increases. One more note, if interest rates are increased due to late payments, customers who make six consecutive months of on-time payments will be allowed to return to the lower rate.
- Due dates. Credit card issuers must give cardholders at least 21 days to make a payment, and those due dates must be the same day of every month. Previously, issuers only had to give customers 14 days and payment dates could vary during the month. Having standardized due dates should help consumers better plan their payments and anticipate their statements.
- You may want to mark your calendar each month so you are aware of those due dates to reduce the potential of paying late fees.
- Fee calculations. The new law bans double-cycle billing, which is the practice of basing finance charges on the current and previous balance. Under this method, the issuer could charge interest on debt already paid off the previous month.
- Over-limit fees. Cardholders will need to “opt in” to exceed their credit limits, greatly reducing the potential for overlimit fees. This change applies to both debit and credit cards. Unless cardholders specifically choose to pay over-limit fees, credit card purchases will be limited to the stated credit limit. Many credit card issuers are simply eliminating the overlimit option, which means consumers need to be more aware of their credit limits.
- Payment allocation. The new rules require that all payments above the monthly minimum be applied to the credit balance with the highest rate of interest. This change is especially important for cardholders who use the cash-advance feature, which generally carries a much higher interest rate than purchases.
- Student Credit Cards. Potential cardholders under the age of 21 will need to provide evidence of income or have a co-signer in order to receive a credit card. According to a recent study, the average college student has a credit card balance over $4,000 and more than 80% of all students carry over that balance from month to month. The legislation specifically targets practices of incentives on college campuses, requiring colleges and universities to disclose their contracts with credit card issuers and prohibits the distribution of “free” gifts for credit card applications.
- Statements. Credit card statements must now include information on minimum payments, such as the amount of time to repay the debt and the total amount paid when making minimum payments. Statements must also include information on receiving free credit reports.
- Compliance. The new legislation allows for much heftier fines for credit card issuers who fail to comply with the new reforms and requires regulators to report annually to Congress about their efforts in enforcing this legislation.
While these new provisions are designed to protect consumers, the best protection is monitoring your spending habits. Credit cards may be a substitute for cash, but all charges made on credit cards must be repaid.
Only charge what you can afford to pay at the end of the month. Should you need to carry a balance over from one month to another, always pay more than the minimum to reduce the total amount of interest due. Those “sale” prices are not such a good dealafter you add the interest!
Sue Lynn Sasser, PhD, is an associate professor of economics at the University of Central Oklahoma.