Big changes are headed to your wallet. On Monday, Feb. 22, a sweeping law takes effect that’s designed to permanently alter the relationship between consumers and their credit cards.
Under the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, there will be new limits on interest rates and fees, and credit card statements must include more information about the extent of a consumer’s debt.
“The whole idea is that issuers will have to make their profits through up-front practices,” says Lauren Bowne, staff attorney at Consumers Union.
The biggest change for most consumers, experts agree, is a ban on hiking interest rates for existing balances in most cases.
Until the CARD Act goes into effect, credit card issuers are free to double or triple interest rates for no reason at all. Since these rate hikes affect existing balances, your minimum payment could also double or triple.
“It’s the only loan product where the issuer can retroactively change your terms and increase the cost of debt that you’ve already incurred,” Bowne says.
One-year freeze on rate hikes
After Monday, card issuers will not be able to increase their interest rates for the first year after an account is opened.
The CARD Act will also force credit card companies to issue credit more carefully, screening out potential defaulters who raise costs for everyone. Issuers will be required to verify income and consider a person’s assets and current financial obligations before doling out a line of credit.
“They should not be giving people more credit lines than they can comfortably pay,” says Linda Sherry, national priorities director for Consumer Action. “That’s never been required,” she said.
Similarly, there are new limits on credit card distribution to young adults and on marketing at college campuses.
Credit card users who carry a balance will find new mandatory information on their monthly statements, telling them how long it could take them to pay off their debt or how much they must pay to eliminate the debt in three years.
“I think this will be shocking to many people,” says Bill Hardekopf, CEO of LowCards.com. “Hopefully it will light a fire under a lot of consumers by being out in black and white.”
The CARD Act will also bring an end to practices such as extremely high fees for exceeding spending limits and charges for making payments over the telephone or online. Credit card issuers will also be required for the first time to apply any payment in excess of the minimum toward the balance with the highest interest rate.
Despite all the changes, credit card issuers still retain significant sway over the issuer-consumer relationship and will no doubt be on the lookout for new ways to make money.
“It will help consumers that they’ll have clearer, more transparent information about their accounts,” says Betty Riess, a spokeswoman for Bank of America, one of the nation’s largest credit card issuers.
Watch out for new fees
“This is a great step in the right direction, but it doesn’t cap rates or fees or restrict the type of fees issuers can charge,” says Bowne of Consumers Union.
Since President Obama signed the Credit CARD Act into law last May 22, card issuers have tightened credit lines, raised interest rates and imposed more fees. Don’t expect these tactics to end anytime soon, Hardekopf says.
Like most issuers, Bank of America began making changes as soon as the CARD Act was signed into law, Riess says. While the bank already began halting many interest rate increases, it also instituted new annual fees to certain customers.
And annual fees are just one example. Over the past year, many credit card issuers tightened credit lines while introducing a number of new fees—for everything from balance transfers to card inactivity—while increasing interest rates.
It is likely that issuers will continue to increase fees and create additional charges—for receiving paper statements, for example—while cutting rewards as they look for new ways to keep their bottom line healthy. Also, it will likely be harder to get approved for a credit card, especially if you lack strong credit or proof of income.
“Because the Credit CARD Act passed is not a ticket to go out and run up your balance,” Hardekopf says.
What’s new in your wallet
- Interest rates: Credit card issuers will not be allowed to increase interest rates on existing balances unless the customer is more than 60 days late with a payment. Exceptions to this rule are if the card has a variable interest rate or if the rate is part of an expiring promotional deal.
- First-year protection: For card accounts opened after Feb. 22, issuers cannot raise interest rates at all for the first year.
- Over-the-limit charges: If you reach your credit limit, you will no longer be able to continue making charges, and you’ll be charged no over-the-limit fee. That is, unless you tell your card issuer that you would like to allow over-the-limit charges (and fees).
- Putting debt in black and white: Statements will be required to note the amount of time it would take to pay off the current balance if the customer makes the minimum payment each month. They will spell out the monthly amount needed to pay off the current balance in three years.
- Minimum payments: Any amount paid over the required minimum payment will be allocated toward the balance with the highest interest rate.
- Fees: No more fees for paying by phone or online.
- Tighter standards: Credit card issuers will be required to consider a person’s ability to pay by looking more closely at income, assets and current obligations before issuing credit or establishing a credit limit.
- Predictability: Payments must be due on the same day every month.
A few CARD Act changes went into effect last August
- Advance notice: Credit card statements must be mailed at least 21 days before the due date.
- Forewarning: Issuers must provide a 45-day notice of any significant change to an account—such as a rate increase. Then, consumers can either accept the changes or cancel the card and retain their old terms while paying off any existing balance.
Michelle Diament is a freelance writer based in Memphis, Tenn.
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