Today may well be the first day of the rest of your financial life. Major provisions of the CARD Act – or the Credit Card Accountability, Responsibility and Disclosure Act of 2009 – go into effect today that create new credit card rules that are more consumer-friendly. (As you know from my earlier post on annual fees, some card issuers are already fighting these rules in a not-so friendly manner.)
Here's a look at the major changes, what I believe consumers should expect the card companies to do in return, and what you should do about them.
New Rule: Card issuers can't hike interest rates on existing balances (or on future ones for the first year you have the card) unless you have a variable rate card, you're coming to the end of a teaser (or promotional rate), or you pay your bill 60 days late.
Likely Card Company Strategy: To issue variable rather than fixed-rate cards in the future (as they've been doing for the past few months).
What You Should Do: Understand, when the index – like the prime rate – that your variable rate card is tied to changes, the card issuer does not have to notify you of an interest rate increase or decrease for that matter. (Though the latter isn't likely anytime soon.) To prevent paying late, use automatic bill payment and schedule your credit card bills for an amount that you know will at least cover your minimum payment. Then go into your records and increase the amounts when the bills come in.
New Rule: Card issuers can't change the terms for repaying an old balance except that they can give you five years to pay off your balance at the old rate and double your minimum payment.
Likely Card Company Strategy: Tell you doubling the minimum is actually good for you and showing you how much more quickly it will get you out of debt and how much less you'll pay in overall interest.
What You Should Do: Cooperate. Triple or quadruple the minimum if you can.
New Rule: You can't be charged a fee for going over your credit limit (an over-the-limit fee) unless you tell the card company you want it to allow you to exceed your credit limit.
Likely Credit Card Company Strategy: To try to get you to opt-in to "protection" that will allow you to continue to use your credit card whenever you want and wherever you want.
What Your Should Do: Opt out. For god's sake, opt out. (If you are insane enough to opt in, you should know that you can only be hit with one fee per billing cycle as long as your balance is above the credit limit on the last day of your billing cycle. The fact that this language is so convoluted I had to read it three times to understand it is yet another reason you'll want to opt out.)
New Rule: Card issuers have to tell you how much time it will take – and how much interest you'll pay – if you make only the minimum payments. They'll also lay out how much you have to pay if you want to be debt free on this card in three years.
Likely Card Company Strategy: With the amount of media exposure they've been receiving, they're going to adhere to this one.
What You Should Do: Pay attention. People are continually shocked at how much they're actually paying in interest. As Bill Hardekopf of lowcards.com said pointedly: "Having this in black and white is one of the great wake-up calls of our time."
New Rule: Cards can't be issued to people under 21 without the signature of a cosigner over 21 or proof of income that would establish the ability to pay. Also, there will be no credit limit hikes on cards to account holders under age 21 unless the cosigner grants permission in writing. Much to the chagrin of college students everywhere, there will also be no more free t-shirts or soda or other gifts to college students on campus for filling out a credit card application.
Likely Card Company Strategy: Market to the parents about why they should co-sign so that their kids away from home have credit cards to use "in an emergency."
What You Should Do: Tread carefully. Co-signing means you're on the hook for the funds if your kid doesn't pay up. I wouldn't do it. But if you decide to, make sure to keep the credit limit on the card under $500 or $1000. (Note: It's no longer true that you need a credit card to rent a car in most cases. Debit cards with the Visa or Mastercard logo will suffice as long as there's enough money in the account to cover the rental car charges and incidentals.)
Finally, there are some other changes you should know about. Card companies aren't likely to do much about them, and you don't need much of a reaction, but they're good to have on your radar.
· Card issuers have to give you 45 days notice before raising interest rates on future purchases.
· If your interest rate goes up because you paid 60 days late, if you make the next 6 months minimum payments on time, your old rate must be reinstated.
· Two cycle billing is no longer allowed, which means issuers have to calculate the amount of interest you owe them for the current cycle based on the current cycle only. (Also convoluted, but a good thing.)
· The date on which you have to pay will be the same each month. Your payment must be received by 5 p.m – not earlier.
More rules take effect in August. So stay tuned.
CARD Act: New credit card rules and regulations you need to know