Update: Read more about CARD Act of 2009 here.
It looks as though we will be seeing some of the first serious credit card reform since…well, ever. The House passed the Senate’s version of the Credit CARD Act of 2009. This, taking effect in February 2010, is meant to protect consumers from the abuses of credit card companies. While there is no protection greater than sound and responsible credit habits, a little extra protection never hurts. Here are some of the big changes to the way credit card companies will be able to function as the new Credit Card Reform Act comes into being – and how it affects you:
How Payments are Applied to Balances
When you get a promo rate for a portion of your balance, it is lower than your regular purchase rate. Likewise, a cash advance rate is usually higher than your purchase rate. For instance, on a credit card with a $2,500 balance, you might have:
- Promo rate of 2.99% on $800
- Cash advance rate of 27.99% on $700
- Regular purchase rate on $1,000.
Currently, the credit card issuer would apply your payment (after interest is deducted, of course) to the debt with the lowest interest rate. This way, your balance will earn highest interest for the longest possible period of time. The new rules change this policy. Now, the principle payment will be applied to the debt with the highest rate first. For those who carry balance with different rates, this means you can pay off the overall balance a little faster, and pay less in interest charges.
Retroactive Interest Rate Hikes
Right now, credit card companies raise interest rates if something worsens in your credit report – even if it happens to a different account. Being late on one payment could trigger interest rate hikes on all your cards. This doesn’t change. What changes is the way the interest rate hike is applied. The new rules say that, unless you are 60 days delinquent on your account, the new interest rate can only be applied to new balances. Your old balance has to be charged at your old rate. For those working to pay down their debt, this is encouraging. It means that as long as you stay current, your old balances will not be charged more.
Notice of Changes to Card Agreements
Credit card companies today can change rates, rewards programs and other terms of the card agreement at any time – for no reason and with no notice. They can even retroactively date changes so that the terms change as of two months before you were notified. The new law requires that credit card companies give 45 days notice before making changes. For those who like to be in control of their credit card account, this will be quite helpful. 45 days might be enough time for you to adapt a new plan to pay the card off before the changes. For those with rewards points, 45 days will give you time to use those points, instead having all your points unceremoniously removed (or dramatically reduced).
Over the Limit Fees
Credit card issuers make a great deal of money by letting you keep charging, even if you are over your credit limit. For each occurrence, you end up paying $39, or more. That amount is added to your balance, and you are charged interest on it. Now, credit card companies will have to get your permission to do this. I’m not sure how the “opt in” will work, but you will have to agree to allow this to happen in your credit card agreement. For those who do not keep careful track of their spending, being cut off immediately might encourage them to change their habits. And, as long as you don’t opt in, it means no more over the limit fees.
Age Requirements for Credit Cards
Today, anyone over the age of 18 can get a credit card without a co-signer. The new law, requires a co-signer for anyone under 21. This means college students will have a hard time getting credit. If someone under 21 can prove that they have a job, and can make payments on a credit card, the requirement for a co-signer will be waived.
What to Watch Out for in the Coming Months
Because the new credit card act rules will not take effect until Feb 2010, it is important that you remain vigilant and consider the affect this legislation might have on you. Watch for interest rate hikes on your credit cards. Some issuers may try to raise rates while they can. Another thing to watch out for is an accelerated loss in terms of the value of your rewards points. You may see your 5% gas rewards cut to 3% or 4%. Or your airline miles may not go as far as they did. Also, be on the look out for the possibility of new annual fees. “Premium” reward programs have been emerging recently, but you may see more of them in coming months. And, finally, watch your mailbox carefully for “opt in” agreements for over the limit transactions. Who knows how the credit card companies will try to implement this, but you know that they will want you to opt in. Be especially careful to read everything you get from your credit cards in the coming months.
Finally, the Credit Card Accountability Responsibility and Disclosures act of 2009 is not a panacea. You still need to be responsible in the way you handle your credit.