Highlights
- A rate increase can ONLY be applied to an existing balance IF the cardholder is delinquent.
So, expect credit card companies to find new ways to declare you delinquent.
- If your credit card gets a rate increase on NEW balances, you must be notified 45 days in advance.
This puts no limit on the amount of the increase, does not require the credit card company to get your agreement to the increase, and places no restriction on the reason for the increase.
- Those under 21 can’t apply for a credit card unless they have a co-signer, income, or pass a course.
This effectively removes one of the most profitable segments from the credit card companies. To make up for these lost customers, expect higher interest rates, higher up-front fees, and more restrictive terms.
Credit CARD Act.
On May 22, 2010, the Credit Card Accountability, Responsibility and Disclosure, or Credit CARD, Act of 2009 was signed into law by President Barack Obama. This act changes how credit card companies make disclosures to their customers and ends a few of the more egregious practices prevalent in the credit card industry.
Major Changes.
Recent years have seen very arbitary, punitive, and deceptive practices engaged by many credit card issuers. Whether it was interest rates, fees, balance transfers, low introductory rates, changing payment dates and balances, or aggressive collection practices, people who were being exposed to many activities that made having a credit card quite an adventure!
To combat this, Congress decided to reign in some of these business practices. While customer complaints were mounting, that was not the motivation behind this new legislation. Rather, it was the financial distress of 2008 that motivated these restrictions on credit card activities.
Quite simply, the very groups that offered the greatest profit potential for credit card companies (the young and the working poor) could no longer afford to keep their credit cards. Those who had ample credit and means other than borrowing, were using credit offers to cut credit card companies profits to almost nothing. With this squeeze, Congress had to do something.
Protecting the Public.
To give the credit card companies and other lenders, a chance to regain their footing with borrowers, new regulations were created to provide for a more stable and sustainable credit environment. A few changes had to be made.
Retroactive rate increases are STOPPED! (not really)
Generally, under this new act, lenders can no longer raise interest rates on existing balances. However, this is not true in every case. If your contract specifically spells out that the rate can be changed, on an existing balance, you still are liable to pay the higher rate.
3 specific instances can occur to raise your rate on an existing balance, despite the Credit CARD Act.
- You have a promotional rate offer that expires, such as a balance transfer.
- You have a variable rate card that is indexed to the prime rate and it has increased.
- You are delinquent on payments for 60 days or more.
Higher Interest Due To Other Cards.
In theory, credit cards are prevented from raising interest rates for late payments on unrelated accounts under the pretense of universal default or “anytime, any reason” clauses. Then again, there is nothing preventing a credit card company from changing its contract terms to reflect their opinion of new credit realities (just an excuse to raise your rate while circumventing the Credit CARD Act).
Delinquent Payments.
If a credit card company classifies as a card holder as 60-day delinquent, the bank must restore the lower rate after six months of consecutive on-time payments. Of course, the challenge here is that the lender decides when payments are due. There is nothing to prevent them from making it very difficult to meet this standard, when it is possible to change due dates, send monthly bills late, or put holds on certain payment types (e.g. 5-10 day holds on check payments). The Credit Card ACT doesn’t addres any of these possibilities.
Generally, in the first year after issuance, interest rates cannot go higher. Promotional rates must last a minimum of six months. This does not include…
- promotional rates,
- the ending or completion of a workout plan,
- a change in the index rate used to establish an interest rate, or
- a 60-day delinquency.
In other words, the only interest rate increase the Credit CARD Act covers are those not covered in the contract. It does not prevent a credit card company from raising rates if it is covered in the contract or agreement.
In fact, as long as they claim you were given 45 days notice, lenders can raise your interest rate at any time and for any reason on any NEW balance.
Credit Limit Changes.
There are no provisions in the Credit CARD Act that limits any action by a credit card company from changing your credit lines. If your credit card company slashes your credit limit, cancels your card, or reduces your limit JUST ABOVE your existing balance, they have not obligation to notify you.
The only time a credit card company must tell you when a credit limit has changed, is if it triggers a penalty. For example, if a credit card reduces your credit line below your existing balance AND that triggers and overlimit fee, you must be notified first.
Always remember, no credit act, credit right, or credit protection places any limit on the maximum amoung you can be charged in interest. For instance, an increased rate could triple your existing APR. You have no recourse under the law.
Fee restrictions.
While this is the Credit CARD Act, this particular change applies to debit cards as well. Cardholders, whether debit or credit, are no longer subject to overlimit fees without their approval. Card issuers are allowed 1 overlimit fee per billing cycle.
Paying to Pay?
Banks can no longer charge you when paying a credit card debt. This practice occured with telephone or Internet payments. The only fee that can be charged is to expedite a payment. So, expect to see telephone and internet payments recategorized as express payment options, while regular payments experience constant busy signals or wait times and very confusing or burdensome website payment systems.
Due Date.
Payments received on the due date (or the next business day) if the bank doesn’t process a mailed payment on the due date do not trigger a late fee. If paying at a local branch, the payment must be credited the same day.
This does not end the practice of changing billing cycles or sending billing statements late. You are still liable for fees in both cases. You have no protection if your billing cycle was 23 days this month, rather than the usual 30. It is entirely your responsibility.
Low and No Credit Cards.
The Credit CARD Act does not eliminate “fee-harvester” subprime cards. It does change the way the fees are charged. After issuance, in the first year , nonpenalty fees cannot be more than 25 percent of the initial credit limit. Of course, this does not address the limit on fees if the credit limit is reduced. In that case, you still have to pay the fees, despite exceeding 25 percent in that circumstance.
Restricting Credit Access to the Young.
For those under 21, without an independent source of income or a co-signer 21 or older, won’t get a credit card.
Ultimately, this may only push them to payday lenders and pawnshops.
Double-cycle billing.
The outrageous practice of double-cycle billing is basing finance charges on the current and previous balance. Essentially, an issuer could charge double on the same borrowed amount.
This was ended because it gave an incredible advantage to lenders who depended on the poor, young, and desperate for loans. More established creditors with higher standards could not compete for these customers, leaving them out of this profitable market.
The Credit CARD Act is inteneded to end this practice and restore more balance among the credit card issuers.
Fairer payment allocation.
A close look at your card agreement will likely reveal a clause that explains that payments will be applied to lower-rate balances first. Not so anymore. The Credit CARD Act requires above-the-minimum payments to be applied first to the credit card balance with the highest interest rate.
7. More time to pay
Card companies must send statements 21 days before a payment is due. Current law requires a mere 14 days’ notice. This provision goes into effect Aug. 20, 2009.
8. Gift card protections
The legislation includes protections for gift cardholders. The new law prohibits gift cards from expiring for at least five years. Issuer cannot assess inactivity fees unless the card has gone unused for 12 months.
