New Credit Law May Squeeze Cardholders

Pam Banks, senior policy counsel for Consumers Union, says she expects consumers to ultimately benefit from a more competitive business model as credit card issuers seek to retain credit-worthy cardholders.

“I think this will increase competition among the banks to try to keep good customers,” she says. “Customers may be able to get even more perks because there will be a set of people banks look for.”

If interest rates do become onerous stemming from the new reforms, Banks says, consumers may start to abandon credit cards and use debit cards and cash instead to pay for expenses.

“Credit card companies have an obligation to present fair terms that customers can understand and rely upon to manage their accounts,” she says. “Consumers have a responsibility to first afford the credit and then pay on time.

“This is not about trying to cut consumers off from cards,” she says. “It’s just evening out the playing field so consumers have a sense they can control their own destiny.”

The new bill, which becomes effective in February 2010, makes fundamental changes in how consumers obtain credit cards, use them and pay the bills:

* Rate increases: A cardholder’s annual percentage rate generally cannot be increased unless a written warning is provided 45 days in advance. No rate increase can take place until the account has been open a year. These provisions take effect 90 days after the bill is signed into law.

* Existing balances: Interest rates, fees and finance charges cannot be increased on any existing card balance with some exceptions, such as the expiration of a promotional rate or if the cardholder fails to make a minimum payment.

* Due dates: The payment due date must be on the same day each month, and if it falls on a weekend or holiday, a payment is on time if it is received on the first subsequent business day. Statements must be sent at least 21 days before the payment due date.

* Highest rate paid first: If different interest rates apply to the same balance, any payment in excess of the minimum must be applied to the balance with the highest rate.

* Double-cycle billing: No finance charge is permitted on balances from any billing cycle before the current one.

* Young consumers: No credit card solicitation can be sent to a person under 21. No card can be issued to a person under 21 unless the person has a cosigner or demonstrates financial independence. The credit line for a college student under 21 with a cosigner cannot be increased unless the cosigner approves.

* Gift cards: Bars fees for lack of activity unless the card has not been used for 12 consecutive months. Gift cards cannot expire until five years after they are issued.

The bill also contains one unrelated measure that allows people to carry loaded, concealed weapons into national parks.

Carole Fleck is a senior editor at the AARP Bulletin.