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Credit CARD Act of 2009: How it Affects You

CARD Act of 2009: How it Affects You

Source: sxc.hu Photo: intuitives

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.

25 Responses to Credit CARD Act of 2009: How it Affects You

  1. Rick Vaughn says:

    I think we can all agree this is a long awaited change. I’m just sad it’s going to take so long. There are alot of people that are saying the credit card companies are already distressed. However, any business model that only succeeds when people default is not a good business model in my book.

    Rick Vaughn’s last blog post..Benefit of Credit Unions

  2. Shailesh Kumar Arohan says:

    @Rick, I agree with your sentiments. No business has a god given right to grow forever. If the size of the business grows beyond where it stops adding value to the economy and starts creating unhealthy stress lines (like amount of debt or leverage) than its wings need to be clipped. I would have preferred a private market mechanism to control the industry but in absence of such, government reglations will do.

    Arohan’s last blog post..As Economic Recovery Takes Hold, Get Ready for a Changing Regulatory Environment

  3. Bill says:

    Does this new law apply to in-house cards – target cards or BP cards, etc. and not just the big credit card companies?

  4. Mack jackson says:

    Thanks for sharing such great post, what i want to say is co-signer is necessary for students is good to protect frauds.

  5. Linda says:

    Miranda, I applaud you on the succinct breakdown of this most recent legislation. I recommend that everyone check to see if their credit card is up to snuff — a free tool called BillShrink.com analyzed my credit card usage and gave me recommendations; I found a new card that saved me $1000 over two years. Better to have computers wade through the tedious fine print and zillions of options rather than me. These next few months will be crucial to see how credit card companies and banks respond to these changes in policy. We users must stay on our toes!

  6. Antonius Banks says:

    wow this is very good i remember when you would get decline if there was no money on your card and that was good meaning no over the limit fee.but up until now you were allowed to go over and the fees went crazy.Accountability is always the number key.thanks for thi very informative artical.

  7. Jay Rigney says:

    Thanks, Miranda, for your clear summary of changes we’ll see resulting from CARD legislation. But perhaps some of your statements could be misinterpreted…

    For example, you say that “credit card companies can change interest rates…at any time — for no reason and with no notice.”

    To most of us, ‘credit card companies’ are companies like Visa or MasterCard, but Visa and MasterCard don’t issue credit cards and don’t change interest rates.

    Credit cards are issued by banks, and it is banks who set (and change) interest rates and account fees, establish credit limits, send monthly statements, etc.

    Banks do not change interest rates “for no reason.” I think what you might have said instead was that banks might change interest rates for reasons unrelated to consumers’ specific account behaviors. But even that would be misleading, because most changes in interest rates do reflect account history in some way.

    And the suggestion that changes can be made without notice is misleading as well. In most states, banks are required to notify cardholders when changes are made to their accounts. Few consumers read those notices, but that’s not the banks’ fault.

    Credit is a relationship between a consumer and a bank, and the credit problem in America today has less to do with the ethics of bankers than with the ethics of consumers. And here is the really sad thing about this — it will have absolutely no long-term effect. History has shown again and again that making it easier for consumers to pay off their credit card debt only means that they will extend themselves further.

    The most helpful advice you could give to consumers dealing with credit card debt is simply this:

    CUT UP YOUR CARDS AND STOP SPENDING MONEY YOU DON’T HAVE.

  8. M Schmidt says:

    On the downside, the new CARD Act places a 21-day notice of payment in effect. This means that your card company must send a notice out 21 days before payment is due. The problem comes because of the way the law was written. It encompasses ALL open-ended lending. Most credit unions use multi-featured open-ended plans because it cuts down on paperwork and costs. It’s put many into a logistical nightmare to comply. The end result is compliance costs are passed on to the consumer. Many credit unions will move to closed-end documentation for lending which means higher minimum loan amounts and higher loan interest rates. Bottom line, what was designed to help consumers will end up hurting them because it was rushed through Congress and not well thought out.

  9. Connie Sanders says:

    American Express for example has increased my interest rate twice within one year, the first hike in January 2009 and the second to take place in October 2009. What is the administration doing to protect the consumer from credit card companies who are increasing the interest rates before the new law goes into effect in 2010? For the record I pay all my bills on time, I am never late. Unfortunately, it does not seem to count for much as it once did. I welcome any suggestions as this is just an exasperating situation. At this rate I can probably expect another increase in January 2010.

  10. Ken says:

    With the top 3 banks outstanding balance of about 450 billion dollars at an national average of 15% thats like 67 billion return for the banks just on credit cards. I think they all make way to much. Thats why there is no faith in banks. There needs to be more and better reform for big banks.

  11. Lauren says:

    When I called our credit card company, Chase, after they raised our interest rate from June to July, to request a rate adjustment, I was told that CARD Act froze rates until the legislation is enacted (six+ months from now). This seems like a line of bull to me – and a clear violation of its intent. Are there any suggestions or resources that I could use to verify this statement, so I know whether to initiate a formal dispute process?

  12. Miranda Marquit Miranda says:

    @Lauren: As for that, I don’t think that’s accurate. Credit card companies can certainly work with you on interest rates. Try calling Chase and asking for the ProActive Solutions Dept. One possible number you can try is 1-866-351-0182. However, don’t be surprised if you end up at a call center that tells you the department doesn’t exist. At any rate, Chase might be able to come up with something that is a little more workable. Good luck. Working with credit card companies is always an exercise in patience and uncertainty.

  13. Sean says:

    CUT YOUR CREDIT CARDS UP???

    I’m no fan of the credit card issuers, and am even less of a fan of Equifax, Trans-Union and Experian. But to the person that posted this, do you realize the nice increase you have seen in the last 15 years on your 401k would be impossible without increased leverage for consumers? Consumer spending accounts for approximately 70% of GDP. The fact that consumers can buy on credit, and pay for it over a period of time makes the market *way* more efficient. Otherwise money would just be sitting in low interest rate bank accounts for a lot longer.

    If you want to ensure credit cards are not causing a “crisis” (which they aren’t) then monitor the rate of individual bankruptcy against credit card attachment. This would give you a much better indication of their effect. Have not done that, but my guess is you would find a relationship – but not incredibly high – say 5% max.

    The better way to ensure their are not artificial bubbles in the credit system is to ensure that our credit scoring system makes sense for today’s economy. Which it does not. Did you know the FICO score was created before credit cards existed? Are that the way score is created is a essentially a trade secret. All of that goes against things that most free-market economists believe is important: Transparency.

    But remember, banks benefit tremendously from a secret score. It allows them to penalize you, without you being able to know why you are penalized (through a rate increase).

    If the govt. wants to ‘fix’ consumer spending – i.e. make it more stable, and less of a potential bubble in the economy – it needs to ensure the credit score system is transparent.

  14. Cindy says:

    Ken,

    Have you included into your calculations the losses that are incurred from irresponsible credit users who choose to purchase things they can’t afford and then blame others that they should have never been approved? These are the consumers that also pay the minimum payment which will take 25 years to repay the purchase (on average) not to mention the amount finally repaid, who eventually stop the repayment process and walk away from their obligation yet still reep the benfits of their unaffordable purchase? It’s simple 6th grade math to understand what a purchase made on a credit card really equates to.

    Many card programs don’t make a profit at all, they lose money when you consider ALL of the pieces to a credit card program.

    I guess we do need the CARD ACT because the average consumer never went to school past the 6th grade.

  15. ronnie akard says:

    why did the dates on my car loan change? I have for the last 60 years paid my bills on the first of the month now my car payment is due on the 28th. Why? I do not like this!!!

  16. Great review of the recent changes. Unfortunately, most of the people I encounter rarely read their credit card agreement until it is too late… after promptly paying the balance every month.

    While I don’t begrudge any company for making a reasonable profit, it just seems that these companies are able to generate excessive profits based on trickery and deceit.

  17. daniel says:

    Some people have tried to justify the practice of abrupt increase in interest rate without any prior notice. I mean… the below statement by Jay Rigney:

    “Banks do not change interest rates “for no reason.” I think what you might have said instead was that banks might change interest rates for reasons unrelated to consumers’ specific account behaviors. But even that would be misleading, because most changes in interest rates do reflect account history in some way.

    And the suggestion that changes can be made without notice is misleading as well. In most states, banks are required to notify cardholders when changes are made to their accounts. Few consumers read those notices, but that’s not the banks’ fault.”

    They should read consumer experiences before making such statements. Look at comments page mentioned in the link below. The irresponsible behavior of credit card companies cannot be forgiven at any costs.
    [Link Deleted]

  18. Anna May says:

    I just received notice from my Virginia based credit union, that because of changes brought about by the newly passed CARD Act, the interest on my Mastercard was increasing from 7.9% to 17.99% effective Dec. 01, 2009. Interest on my husband’s VISA card is increasing from 10.9% to 16.9%. They claimed this is due to our credit rating. What is going on? How can this be legal?

  19. ron says:

    the banks are slime…, and Congress helped them by not making the Act effective immediately to protect the consumer who is fair game to the cigarsmoking , bonus laden CEOs….pay off your cards….close your accounts, keep your interest rate where it is by doing so….the idea that your credit score will drop has little bearing on “how badly you will hurt” when your interest rates, as a good, and honest payer, are “jacked up” to the sky…and your rate goes from 8% to 19.9% or higher fulfilling the banks lust for more profits off your back and the backs of other good, long-time reliable customers…these immoral acts, taking our TARP money from the taxpayers are payback for “your loyalty”…your credit score will recover…paying “usuary rates” just to keep “their card” and now their fees just to have their card even though you carry no balance is blackmail…close their cards and never do business with them ever again…slime…

  20. Susan says:

    Interesting….I just got a call from my credit card company regarding this bill! Their angle was if I broke down and I was near my credit limit, I would be automatically declined if any emergency charges I made pushed it up over my limit. Since I never go anywhere near my limit (we’re talking thousands of $$ under), I declined for their “opt in” selection. She was very aggressive and I had trouble getting her off the phone, so we’re in for a fight.

    I agree, we should enact the Card Act!

    Susan

  21. Heather says:

    too many people are sitting in judgement, supposing that the consumer plagued with a suddenly higher rate is a foolhardy spendthrift, charging giant TV sets and designer duds beyond their means. Not so.
    for many folks, like me, we pay on time, we don’t abuse credit, and yet FOR NO REASON the banks make changes, raising rates, lowering limits, doing many tricky and sneaky practices.

    to those defending the banks, you must be on the profit earning side of this. shame on you for cheating hard working citizens.

  22. j9 says:

    Bank of America is the worst bank out there with regard to fees, not only with your credit card, but checking too! They go out of their way to make it so you keep getting hit with fees over and over again. Bank of America should be audited for all these sneaky practices the government is trying to crack down on.
    They just lowered my credit limit after I made a very large payment to just over my balance. This leaves me with a $400 available credit. I didn’t know this had happened until I looked at my on-line account. Not only is this hurting my credit score when I’m trying so hard not to but it’s also creating a situation where I’ll go over my limit with a small purchase.

    Please someone investigate Bank of America!

  23. Maria Semonelle says:

    Hi, I am first and foremost a consumer, however,I work for a bank (in credit card disputes).I understand the frustrations and/or elations that the Card Act can and will bring about. But first, let me have everyone step back and remember that we have encouraged this law by complaining about the ‘hidden’ fees/raised interest rates. However, we didn’t complain when we received that ’0%’ balance transfer for 1 year plan and/or 0% financing on furniture for 2 years, did we. Those rates are all in the past. Simply put, banks could raise A.P.R. in the past-whether right or wrong- becuase of people who did not pay their bill or had a poor payment history. This allowed the banks to solicit the ‘good consumer’ into a low-introductory teaser rates. (Do you see my point? ) No more drastically low-promo rates anymore. And no one can blame the banks because there is no law saying issuing banks must offer teaser rates. There are some other concerns that I have about the Card Act which will play out within the next year or so… Will we all be so happy then? I don’t know. Please understand, I am not against the Card Act, I agree with the overall philosophy, however, I must think about where is the responsibility going to be? By the way, I got my first credit card when I was 18 –on my own. My parents helped me understand the importance of good credit. To this day, I have good credit. Maybe parents should have thought about this instead of expecting the banks to educate the youth, is the country suffering now? I don’t know.

  24. Virginia Moving Company says:

    Our clients come to us in all states of credit disarray, and a lot of them tell us about the myriad problems they face in dealing with the credit card companies. We really want to put a new initiative into place where we keep them up to date about The Credit Act, and other types of credit related news items. How can we add a feed to our web site to keep them posted (of this blog, or some other source of info)? Anybody know the technical way to do this? Any help would be much appreciated.

  25. Colin says:

    The Card Act goes into effect today and here is a fun Plentii.com video that explains NEW protections for credit card holders. Give it a look and stay ahead of the game! [Link Edited]