Tuesday, February 23, 2010

Have You Learned What The New Credit Card Rules Really Mean?

Disclaimer: I am not a financial professional, nor should anything here be construed as advice. I simply like to read, a lot, and am somewhat annoyed by the coverage of the new CARD Act implementation, as I feel that there are some points that are not made as clearly as they ought to be. This is for informational purposes only. If you have questions about your specific credit cards, contact your financial professional or credit card issuer.

Whew, that was a mouthful, wasn't it? Regardless, the above pretty much sums it up. A year ago April, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act) was signed into law. It was designed as a way to help consumers better understand their credit cards and not be penalized unfairly. The CARD Act is huge. Massive. And it has a lot of different pieces to it. In fact, the Fed still hasn't ruled on what "reasonable" late fees are -- something that will go into place in September of this year, along with the last of the protections.

In the interim, there have been a few different pieces implemented. In September last year, credit card companies began to have to give you forty-five days' notice prior to changing terms for your credit card, such as raising the interest rate and late fees or changing the rewards program on the card.

Yesterday, February 22, the majority of the provisions took effect. The way some of them have been described isn't very clear, however. Hopefully some of the below information will help you.

Interest Rate Changes:
Previously, banks could raise interest rates at any time. This included both your existing balance and new balances, and they could do it even if you were late on another payment that had nothing to do with them (called universal default - you default in one place and your rate is hiked elsewhere).

Now, banks cannot do this. The rate you are offered cannot increase in the first year you have the account (unless it is an introductory rate, e.g., 0% for six months). There are only three ways that your rate can increase:
1) You have a variable interest rate, and the Prime rate published in the WSJ has climbed. On the flip side, there are also no more floors, so when it was a rate of Prime + 5.99% and Prime was 2% but your minimum rate was 10.99%, you still paid 10.99% - now you'll pay 7.99%.
2) You are more than 60 days late making a payment. At that point, you can (not all issuers have this, so check your credit card agreement) be moved to the Penalty Rate, which is a higher APR. This applies to your entire balance, not just new purchases. However, if you make six payments in a row on time, starting in September, 2010, they will have to move you back to your original rate. The lesson here? Make your payments on time, even if it's only the minimum!
3) Your credit card issuer has given you the proper notice that it is going to increase your interest rate. Again, they have to give you the forty-five days mentioned above, but this increase has two caveats. First, you have the right to opt out (and if you opt out, they will close your account and have you pay it down although you won't have to pay it all immediately - they can, however, increase your monthly payment such that you pay off the balance in five years or double your monthly payment). Second, the rate increase will apply only for new transactions; your existing balance will remain at the original rate.

This brings us neatly to the next item.

Payment Allocation:
This one was always a little murky. Credit card companies can apply your payments however they want. If you have multpiple interest rates, many (but not all!) card companies would apply the payment to your lowest interest rate balance. The effect of this would be that you would pay higher interest than you would have intended. This rule particularly hurt people who opened accounts with 0% rates and made many purchases or transferred balances at 0% but then made subsequent purchases at a higher interest rate.

Now, all credit card companies have to apply any payment greater than the minimum payment to your highest rate balances first. This will help lower the overall interest that people pay if they carry a balance and have multiple rates. However, do your best to pay off your credit card every month so that none of this is an issue for you!

Grace Periods:
Grace periods over the years have shrunk and shrunk. When I got my first credit card, it was a thirty day grace period. By this time last year, I had a card with a twenty-one day grace period. That means that my cycle closed on (for example) the 11th of the month. The credit card company then had to process the account and create and mail my statement. The statement had to be mailed giving me at least fourteen days to pay (per Regulation Z). For many people, this was a challenge to time the bills right, get it turned around the mail, etc - especially when there was a holiday or weekend involved.

Twenty-one days after the 11th meant that my bill would generally then be due on the 2nd of the month, if the month had thirty-one days. Or on the 1st if there were thirty days. Add in February. Now make the 2nd a Sunday, and you have to make sure the payment is in by the 1st. Then again, this is why I pay all my bills online from the issuer's site setting up the payment to be automatically withdrawn on the due date.

Now there are two changes. The statement must be mailed at least twenty-one days prior to your due date, which gives more time. The effect of this means that most issuers have increased their grace periods to 25 days (with some at 23).

The due date for your statement must also be the same each month. If it falls on a weekend, it moves to the next business day. This makes it much easier to remember exactly when you need to pay a bill. Tip: if you're someone who gets a check the same date each month and that poses a challenge to paying your credit card on time due to the timing of your due date, try calling your credit card issuer to see if you can move the due date to a date that works better for your checkbook.

Paying To Pay:
Some credit card issuers charged to take an online payment. Most charged for a phone payment, anywhere from $15 to $25. This is no longer allowed. Making a payment must be a free service. The exception to this is an expedited payment, for example it's 8:15pm and your payment was due today - if you call and make a payment by phone, they can still charge you (although not all do).

Protecting The Young:
I remember being a college student and having credit card companies setting up tables all over campus offering all sorts of goodie. Many of my friends applied for credit cards because of the "fun" of it or because of the high pressure tactics. And yes, some of them got into trouble with them. As an alumnae today, my college has a deal that I'm sure pays them millions to solicit alumni.

Today? No more tables. Credit card companies cannot be give away their free gifts within 1,000 feet of campus or at campus events (bye bye huge tables blocking my way at football games!), which should severely limit credit card solicitations on campus.

If you're under 21, there are also additional protections, although some of it is a sham. Those under 21 cannot receive prescreened offers unless the person consents to receive them (and really, who wants that?). Those under 21 also need a co-signer for the credit card or need to show proof of their ability to repay the debt. That sounds good, right? Unfortunately, in reality that means that the simply have to declare an income. If they say they make $100,000 per year, that's enough proof (per the interpretation of the Fed by the way, not a decision from the credit card companies).

Fees, Fees, Fees:
Credit card companies have come to rely on fees to provide credit to people who ... maybe shouldn't have credit cards. They did things that ranged from charging over the limit fees each time a card went over the limit (e.g., interest pushed you over the limit $39, pay down to just under the limit and then make a purchase $39, and you can do that every day throughout the month and be charged $39 each time). And the subprime cards? They charged huge fees from an application fee to an activation fee to an annual fee to a monthly fee and sometimes all of the above. There was one secured card that gave a $250 limit and charged $256 in fees in the first year. Yikes!

Now consumers have to opt into allowing over the limit fees, and many credit card companies have simply done away with them, knowing that few people will do so. If you do opt in (why?!), they can only charge on over limit fee in a given billing cycle. Additionally, you can't be charged an over limit fee if interest or other fees charged by the credit card company push you over.

And any fees (not late fees, returned check fees, or interest - the avoidable things) has to be capped at 25% of the credit limit for the first year. Granted, 25% can still be fairly high, but that limit is unlikely to be reached except for the very low limit cards aimed at those with no or poor credit. However, this is only the case for the first year the card is open. After that, there is no cap on fees, and I wouldn't be surprised if people with those cards are shocked in month thirteen with the fees charged.

Statement Changes:
I'm lucky that I've always understood my statement. I've been able to figure out what I owe and when I owe it, and that's all I needed to know. But not everyone is that lucky, especially when there are terms that change or fees on specific transactions like cash advances that were hard to find or understand.

Now billing statements have to be much clearer. And also a whole lot longer. The credit card statement I received on Friday was three pages long for less than a page of transactions. (And yes, that cost has to be made up somewhere - Alliance Data Systems is already charging $1 per month for those electing to receive a paper statement.)

The new statement has to clearly lay out how long it will take you to pay off your bill if you pay only the minimum monthly payments (yikes!). It also has to show what payment you'd need to make to ensure you pay off your bill within three years, and they include a toll free number to a non-profit credit counseling agency. There will be a box showing your total interest and total fees paid year to date, along with a late payment warning. You'll start to see this immediately, with major terms outlined clearly and in large type.

Wow this got long fast! There are a lot of other provisions within the CARD Act that went into place yesterday ranging from double cycle billing to . I hope this was helpful to you. If you're interested in learning more about the CARD Act, let me know what you're confused about, and I'll put up another post. In the meantime, know what you're signing up for, and use your credit wisely - it's your money you're spending, so don't waste it on interest and fees!


Alexis AKA MOM February 23, 2010 at 9:06 PM  

I'm so not with it Rick told me all about it. So was behind the times ;(. Thanks so much for the update

Laura February 23, 2010 at 9:57 PM  

So glad to have someone else do the reading and explaining! I get bored and never finish then eventually get screwed over.

BTW I have/had an orchard bank card, someone fraudulently charged on my account. I called, explained, they said I had to call these 3-4 'companies' that were listed on the bill, of course when I did, the numbers were not in service.
I called Orchard back and they said they would take care of it. Apparently they called the SAME numbers I did w/same results, called me back and told me you can call the companies again and reverse the charges but we have done all we can. I figured they would just take the charges off but NO, the charges were PUT back on the card w/ late charges+interest+financing. I finally figured this out when I kept getting statements from them. I thought at first they were just sending me closing the account paperwork and filed it for later. Ummmm yeah they totally screwed me. ANd screwed up my good credit.


Karen February 24, 2010 at 7:03 AM  

I just read all the fun news in the credit card statement we got recently. Wow.

Michelle February 24, 2010 at 10:02 PM  

Alexis - I do hope that it helped you - and others. When I read about it in the papers, so many of the critical details are getting closed over or skipped.

Laura - Ugh, what a disaster. Disputes are always a challenge. I've been lucky the one time I've had to really fight a charge on my account.

Karen - Yeah, all fifteen pages of it? I skipped over quite a bit here, and it was still super long. I'll be interested in the unintended consequences - we've already seen a lot of interest rate raises up to December (to get them in before now) and credit line decreases and credit tightening, etc, and now annual fees look like they're on their way back. *sigh*

septembermom February 25, 2010 at 11:12 PM  

Now I got an education visiting you too! I'm so clueless when it comes to finance. Thanks Michelle.

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