- If you are struggling against credit card companies that raise your interest rate every time you hit a bad financial patch, we have some good news for you. On May 22, 2009, President Barack Obama signed into law the Credit CARD Act (Credit Card Accountability Responsibility and Disclosure Act), which put new rules in place that will create controls over the credit card industry, including protecting consumers from increases in interest rates on existing account balances.
The recent economic crisis and increased job losses caused many consumers, even consumers with good credit records, to skip payments and ultimately default on their credit cards. Consequently, banks lost tens of billions of dollars. Changes that have needed to be considered for a long time finally were agreed upon and approved by the Federal Reserve, the Treasury Department’s Office of Thrift Supervision, and the National Credit Union Administration. The changes are the most sweeping restrictions imposed on the credit card industry in many years and are aimed at protecting consumers from being hit by random interest rate increases and preventing them from lack of adequate time to pay their credit card bills. They also restrict credit card companies from allocating all of your monthly payment to the balances on your card that have the lowest interest rates. Before the rules were put in place, if you transferred a balance at a 5% interest rate and had an existing balance at 19% interest rate, your monthly payment would all go against the balance with the 5% interest rate while your existing balance continued to grow at a 19% interest rate, sometimes causing your overall balance to get larger instead of smaller.
Most aspects of the Credit CARD Act will become effective on February 22, 2010 and all changes must be made by June 30, 2010. However, two provisions became effective on August 20, 2009 (90 days after the legislation was enacted) The first of these provisions requires that credit card companies allow 21 days for consumers to pay their credit card bills, and the second provision requires that credit card companies provide 45 days’ notice when there are changes in account terms.
The biggest credit card companies
in the U.S. include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., Capital One Financial Corp., American Express Co., and HSBC Holdings. Altogether, nearly 16,000 companies issue credit cards in the States. The Associated Press reports that the new rules could cost these companies together more than $10 billion a year in interest payments. Not all companies will be affected by all the rules. Some companies already don’t have account-opening fees and allow more than 21 days to make payments.
The new rules include, among others, the following restrictions:
- Any payment amount above the minimum required payment must be applied to the part of the balance that has the highest interest rate.
- Increases in interest rates can only be applied to new credit cards and on future purchases or advances, not on current balances.
- Borrowers must be given a reasonable period of time to pay. A payment could not be considered late unless the consumer is given a reasonable period of time to pay.
- Unreasonably high fees cannot be charged for exceeding the credit limit because a hold has been placed on the account.
- Unfair practices for computing balances cannot be used, e.g., double-cycle billing. Double- cycle billing is the practice of computing interest twice a month instead of once.
- Unfair fees and security deposits cannot be charged for issuing credit cards. Currently, many “subprime” or “secured” cards for consumers with low credit scores typically have no more than a $500 credit limit but require a large upfront fee, often the full amount of the credit limit. For example, a credit card with a $500 credit limit may require a $500 “security deposit.” The new rules limit that fee to 50% of the credit limit and allow the cardholder to pay off the initial balance over a year, not immediately.
- Offers for credit cards must be direct and understandable and not deceptive.
- Consumers must be given 45 days’ notice before any changes are made to the terms of their account, including increasing the penalty fee for missed or late payments. Currently, many companies give only 15 days’ notice before making changes to the terms of an account.
Federal Reserve Chairman Bernanke said, “These protections will allow consumers to access credit on terms that are fair and more easily understood.” When the rules were first proposed in the spring of 2008, more than 65,000 public comments were submitted, the highest number of public comments ever received by the Federal Reserve. These comments reflected the frustrations consumers have about the way they have been treated by their credit card companies and were requests for help from the federal government. They included comments like people acknowledging they sometimes paid late, often mistakenly, but felt credit card companies were unreasonable to increase the interest rate on their balance because of this; and people who pay on time telling of being hit with a rate increase due to losses from cardholders who don’t pay at all.
The Consumer Federation estimates that U.S. consumers have credit card debt totaling about $850 billion, four times what it was in 1990. While the changes could make it more difficult for people with poor credit to qualify for a subprime card and still leave many concerns to be addressed in the future, the new rules are a good first step toward eliminating unfair, deceptive, and predatory practices that have led many American families deep into debt and to prevent irresponsible lending practices by America’s banks.
These new changes can mean long-term help for those of you who currently struggle with unreasonable credit card practices, but remember that these changes don’t take effect until 2010. It is important to continue to follow your FFEF plan for eliminating your debt and achieving a debt-free future.