Credit Card Changes to Prepare For

By Kelli B. Grant,
Senior Consumer Reporter,

It may be hard to believe, but a kinder, gentler credit card for consumers may just be a matter of months away.

Spurred by a wave of consumer complaints, President Obama and Congress passed the Credit Card Accountability, Responsibility and Disclosures Act (known as the CARD Act) in late May. The goal of the legislation: To eliminate some of the industry’s most controversial practices, including the ability to increase interest rates at any time and for any reason.

While the bulk of the changes won't go into effect until February 2010, consumers can act now to take the best advantage of them.

Here are five ways your credit card experience will change and what you need to know:

1. Retroactive Interest Rate Hikes Will Be a Thing of the Past

Come next February, card issuers will no longer be able to retroactively raise rates on your existing balances unless you’re more than 60 days late on your account. Instead, they will only be able to raise your rate on new purchases going forward.

Say you have $10,000 in debt on a card with a 10% annual percentage yield. Once the new rules take effect, even if the rate jumps to 15%, you’ll still pay the old rate on that balance. The difference in rate means you can eliminate the balance four months faster and save $1,276 in interest. And even if you do miss your payments by more than 60 days and see the rate on that old balance jump higher, issuers must revert to the original, lower rate after you make six months of on-time payments, says Duncan Douglass, a partner with Alston & Bird, a law office in Atlanta.

To Prepare: Issuers have been jacking up interest rates across the board (see our story here for more). If you carry a balance, make sure it’s on a card with a low rate come 2010.

2. Kids Under 21 Will No Longer Have Easy Access to Credit

The days of reps from credit-card companies offering free T-shirts and pizza to college students who apply for a card are coming to a close. The CARD Act prohibits issuers from extending credit to anyone under age 18, unless they are emancipated under state law or are designated as a secondary cardholder to a parent or legal guardian’s account. Issuers must also limit the amount of credit they extend to applicants age 21 or younger to 20% of the cardholder’s annual income or $500, whichever is greater. That’s a far cry from the average $2,169 undergraduates currently carry, according to Nellie Mae, a federal student loan lender. “It’ll keep kids from being inundated with offers for what they see as free money,” says Deborah Bosley, principal of The Plain Language Group in Charlotte, N.C., which advocates easy-to-understand financial disclosures.

To Prepare: If you want your teenager to have his own card instead of being an authorized user on yours, get an application in before February. Just make sure the card doesn’t offer too much available credit or sky-high rates so they don’t get themselves in trouble. (For more ways people with limited history can build credit, see our story here.)

3. Payments Will Go to the Highest-rate Part of the Balance First

Under current regulations, issuers can allocate your entire payment to the lowest-rate part of your balance first. Come February 2010, they must put any portion you pay above the minimum toward the highest-rate part of your balance first, says Stephen Clifford, vice president of financial services for Mintel Comperemedia, a consulting firm that tracks credit-card offers. Someone making a $200 monthly payment (the minimum, plus $50) toward an account with a promotional $2,500 balance transfer at 4% and another $2,500 in regular purchases at 10% would save $197 in interest charges.

To Prepare: Take advantage of low-rate balance transfer offers while you can. Issuers are expected to phase out such offers as the new regulations are implemented. (See our story on credit card traps for more.)

4. Fixed Credit Limits to Reduce Over-limit Fees

Issuers will soon have to get a consumer’s permission to process a transaction that would put his account over the credit limit. Although the provision doesn’t have to be in place until February, card issuers including American Express, Citibank, Discover and U.S. Bank already allow cardholders to set a fixed credit limit. (For more card issuers already following some CARD Act regulations, see our story here.) The potential downside: Your purchase could be declined at the register if you’re too close to your limit, warns Gene Truono, managing director with BDO Consulting, a New York-based financial-services advisory firm.

To Prepare: Decide whether you want to opt in or not. Keep in mind that issuers have been slashing limits without advance notice, leaving many consumers within dollars of -- or even below -- their existing balances. (For more on this problem, see our story here.)

5. More Advance Notice of Card-term Changes

A handful of provisions in the CARD Act go into effect as early as September 2009. One big one: Issuers must provide cardholders with at least 45 days’ notice of rate increases and other changes to their credit-card terms and fees. “It gives you enough time to decide if you’re willing to accept those terms,” says Clifford. “You have an adequate window to make a decision.” Coupled with a requirement for easy-to-understand language on your statement, those changes ought to be easily understandable, too, adds Bosley.

To Prepare: Start reading any disclosure notices you receive from the credit-card company so that you can make an informed decision about whether to stick with that issuer or take your business elsewhere. (For some of the traps you may need to watch out for, see our story here.)

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