How Credit Card Reforms Will Affect You
by Sandra Block, originally published February 21, 2010, in USA Today
Americans have a complicated relationship with credit cards. The average household has nine credit cards. Most of us wouldn't dream of going on a vacation or business trip without one. But many consumers believe the issuers of those cards engage in practices that are deeply deceptive and fundamentally unfair.
In response to widespread complaints, President Obama signed legislation last May that imposed broad new regulations on the industry. Some of the most significant provisions in the bill take effect today. The provisions will outlaw some of the industry's most controversial practices, says Austan Goolsbee, economic adviser to President Obama. The law also requires credit card companies to give customers advance notice of significant changes in the terms of their accounts, he says. Customers will have the right to close their accounts if they disagree with the new terms, he says.
Still, the bill doesn't outlaw some practices that are particularly irksome to consumers. Here's a look at how the reforms will affect your credit cards:
What has changed: Credit card issuers can no longer raise interest rates on existing balances. For example, if you're carrying a balance of $5,000 with a 13% interest rate, your credit card issuer can't raise that rate, except under certain circumstances. In addition, if you open a new credit card account, the issuer can't raise the interest rate for 12 months.
This provision is the most significant reform in the legislation and has the potential to save consumers billions of dollars a year, says Nick Bourke, manager of the Pew Charitable Trusts' Safe Credit Cards Project. "Starting now, consumers can no longer experience enormous rate increases on money they've already borrowed."
What hasn't changed: The legislation imposes no limits on the rates credit card issuers can charge new customers. Nor does it limit how much card issuers can raise rates on future purchases, says Josh Frank, senior researcher for the Center for Responsible Lending.
The prohibition on retroactive rate increases means credit card companies "are going to be more aggressive at changing rates on future purchases, and rates in general for new accounts are going to be higher than they were," says Ben Woolsey, director of consumer research for CreditCards.com.
There are also exceptions to the retroactivity rule. Credit cards can raise rates on existing balances if:
- The card has a variable interest rate and the underlying index — such as the prime rate — increases. In anticipation of the reforms, most banks have moved away from fixed-rate cards. In July 2009, less than 1% of bank-issued cards offered fixed rates, down from 31% in December 2008, the Safe Credit Cards Project says.
- The card has an introductory "teaser" rate for a specific period and that period expires.
- You're more than 60 days late on a monthly payment. However, the issuer must restore the old interest rate after six months if you make on-time payments during that period.
What has changed: Credit card companies are no longer allowed to charge a fee when you exceed your credit limit unless you sign up for this service.
Card issuers will also be prohibited from charging extra because of the way you pay your bills. For example, you can't be charged a fee for paying your bill by phone unless you request expedited payment or ask for help from a customer service representative, Bourke says.
What hasn't changed: Credit card issuers will still be allowed to charge annual fees, inactivity fees and other types of fees, Woolsey says. And an increase in those types of fees is a certainty, says John Ulzheimer, president of consumer education for Credit.com. Card companies are facing the loss of billions in revenue in over-the-limit fees, he says, "which means higher fees elsewhere and new fees we've never even heard of yet."
What has changed: Many borrowers have several lines of credit with different interest rates on the same credit card. For example, you could have one rate for a cash advance, another rate for purchases and still another rate for a balance transfer. In the past, when borrowers sent in a payment, issuers usually applied the entire amount to the balance with the lowest interest rate first. Now, issuers will be required to apply any amount paid beyond the minimum to the balance with the highest rate, Bourke says. Other changes:
- Credit card issuers must mail or deliver your bill at least 21 days before your payment is due.
- Due dates must be the same every month. If the due date falls on a weekend or holiday, the payment must be credited on the next business day, with no late penalty.
- Banks can no longer use a customer's average daily balance over two months to calculate interest, a practice known as "double-cycle billing."
What hasn't changed: When card holders have credit lines with different interest rates, card issuers are still allowed to apply the minimum payment to the lowest-rate debt. "If you're making just the minimum payment, this won't help you," Bourke says.
Disclosures and notices
What has changed: Card issuers are required to give 45 days' notice before raising interest rates, changing certain fees, such as annual fees or cash advance fees, or making other significant account changes.
Credit card issuers must provide borrowers with more information about the cost of carrying a balance. In monthly statements, you'll receive an explanation of how long it will take to pay off your balance if you make the minimum monthly payment. Your statement also will include an explanation of how much you'll need to pay monthly to eliminate your balance in three years.
Statements also must disclose the dates by which payments must be received to avoid late charges.
What hasn't changed: Card issuers can close your account or lower your credit limit for any reason, without giving you advance notice, Frank says.
In recent months, credit card companies have sharply lowered credit limits for thousands, a trend that's expected to continue, credit card analysts say.
Still, the new provisions will change some of the industry's most egregious practices, Bourke says. Now, "If you use your credit card for purchases, pay your bills and occasionally you're a couple of days late, your card is not going to blow up in your face," he says.