You’ve heard about it for months now and the time has finally come: credit cards as you knew them will never be the same. President Obama signed off on a new law that is meant to both protect the average consumer from all the deceptive practices that card companies had been using over the years and to give those same consumers a reality check as to what borrowing on credit really means. The law just took effect Monday, Feb. 22.
What got many consumers in trouble in the first place was not having a full understanding of how credit works, thus many borrowed more than they could repay, at least in the foreseeable future. The benefit of consumers not being aware was a financial field day for card companies, but the new law will bring an end to the deceptive ambiguity. Here’s a rundown of how the new credit law will affect you.
More time to pay monthly bills: Under the credit card law, issuers would have to give card account holders “a reasonable amount of time” to make payments on monthly bills. That means payments would be due for at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or that are moved up, giving them less time to pay their bills and increasing the likelihood of incurring late fees.
Clearer due dates and times: Credit card issuers would no longer be able to set early morning or other arbitrary deadlines for payments. Cut-off times set before 5 p.m. on the payment due dates would be illegal under the new credit card law. Payments due at those times or on weekends, holidays or when the card issuer is closed for business will not be subject to late fees.
Highest interest balances paid first: When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first. Current industry practice is to apply all amounts over the minimum monthly payments to the lowest-interest balances first — thus extending the time it takes to pay off higher-interest rate balances.
Limits on over-limit fees: Consumers must “opt in” to over-limit fees. Those who opt out would have their transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees charged for going over the limit must be reasonable.
No more double-cycle billing: Finance charges on outstanding credit card balances would be computed based on purchases made in the current cycle rather than going back to the previous billing cycle to calculate interest charges. So-called two-cycle or double-cycle billing hurts consumers who pay off their balances, because they are hit with finance charges from the previous cycle even though they have paid the bill in full.
Subprime credit cards for people with bad credit: People who get subprime credit cards and are charged account-opening fees that eat up their available balances would get some relief under the new credit card law. These upfront fees cannot exceed 25 percent of the available credit limit in the first year of the card. Instead of charging high upfront fees, some issuers are considering high interest rates on these high credit risk accounts.
Minimum payments: Credit card issuers must disclose to cardholders the consequences of making only minimum payments each month, namely how long it would take to pay off the entire balance if users only made the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they want to pay off their balances in 36 months, including the amount of interest.
That sums up the benefits to the consumer, now it’s time for the bad news. The card companies had 9 months to prepare for the changes and did everything in their power to preserve their ability to make a profit. Here are some of the things that you’ll see that were put in place to counter the new laws:
Interest rates could be higher by 2 to 3 percentage points: The average rate offered for a new card climbed to 13.6 percent, from 10.7 percent during the same period a year ago — meaning cardholders had to pay almost 30 percent more in interest, according to Bankrate.com. For millions of other accounts, variable interest rates that can rise with the market replaced fixed rates.
New fees were created and old ones were raised — these new fees include a $1 processing fee for paper statements for cards issued by certain stores. Inactivity fees could be imposed on customers who haven’t used their cards for a specified period. Other banks increased existing fees such as the cost of balance transfers from one card to another.
Credit lines were cut on many cards: About 40 percent of banks cut credit lines on existing accounts, much of it unused credit.
Credit cards won’t be as easy to come by, especially for those in the subprime group: some subprime borrowers may not be able to get cards at all, at least for the next few years. They may be limited to alternatives like PayPal and other electronic payment services, prepaid cards and payday lenders.
Some annual fees were resurrected — common until about 10 years ago, 43 percent of new offers for credit cards contained annual fees, versus 25 percent in the same period a year earlier. Several banks also added these fees to existing accounts.
Companies are also making fewer solicitations: Mailed offers for new cards increased in the final three months of 2009 for the first time in two years, but there were only about 575 million. That’s about a third of the average number of quarterly offers from 2000 through 2008, according to Mintel.
–gerald radford
