The 2009 Credit Card Reform Act takes effect next Monday so I thought this would be a great time to review what this means for you. If you have a credit card now, if you plan to have a credit card in the future, or if you are financially intertwined with someone who has a credit card, follow me down below the fold. The rest of you are excused, and you can go out and play now.
Before we get to the good stuff, I have an administrative note: I recently revamped the mailing list for announcing these diaries. If you want to get an email announcement each week when a new diary is posted, send me email: frugalfridays (at) gmail.com and I'll add you to the list. If you didn't get an email this week, you are not on the current list.
Notification Rules
One of the biggest changes brought about by this law is that credit card companies must now send you written notification 45 days before they make significant changes to the terms of your account. These changes include most interest rate changes and changes to fees. There are however some exceptions to this notification requirement. For example, if you have a variable rate interest that is tied to an index and that index changes, the company does not need to notify you. In addition, if you signed up for an introductory interest rate with the understanding that the rate would be modified to a new level after a certain period of time, they do not need to notify you when your rate bumps at this pre-arranged point.
Your monthly statement must be mailed or posted 21 days before the bill due date and this due date must be on the same date each month. The statement must also now contain a report showing how long it will take you to pay off your balance if you only pay the minimum payment. Also, the bill will report how much your monthly payment would have to be for you to pay off your debt in three years. Keep in mind that all these calculations are done assuming that you make no additional charges on this account. Obviously these extra charges would extend your repayment schedule even further.
Finally, there are restrictions about type face and language in statements and applications that are designed to make it easier for consumers to read and understand the terms of their agreement.
Although the credit card companies are now legally obligated to inform you of some actions before they take effect, and the fine print can't be the itty bitty font they previously used to use, that doesn't mean they have to make sure you pay attention to that information. As a matter of fact, they will probably make it as easy for you to ignore as they possibly can. Make sure you read and understand everything your credit card company sends you and don't automatically toss anything as junk mail.
Interest Rate Restrictions
No longer will credit card companies be allowed to raise your interest rates at any time for any reason. Here are some of the limitations they must now follow:
- No interest rate changes for the first 12 months that you have the card. An exception is made for introductory rates that may be lower than the stated nominal interest rate. Another exception is in the case of late payments. While companies are permitted to raise your rate if you are more than 60 days late in paying your bill, they must restore it to the original interest rate if you then make six months of on-time payments.
- Introductory rates must last at least six months before they can be raised to the nominal rate.
- Interest rate increases cannot be triggered by defaults to a third party lender. Previously banks would often increase your rate if you defaulted on a debt to a different lender. This is no longer permitted.
- New interest rates are not applied retroactively. In the case of a rate increase, your existing balance will continue to be charged at the previous rate.
- Update [2010-2-19 18:53:54 by sarahnity]: Any payments over the minimum amount must be applied to the portion of your balance with the highest interest rate. This only applies to the portion of the payment in excess of the minimum. The banks are free to apply that minimum amount to whichever portion of the balance they choose. [h/t to PsychoSavannah for catching this in the comments]
Limitations on Overcharge Fees
If a charge is presented that would exceed your current limit, the bank will decline the charge. If they don't decline it, they cannot then charge you an overlimit fee. An exception to this is if you have previously agreed to an overlimit protection plan.
Cardholders Under the Age of 21
If you are under 21, you must show proof of income, or get a co-signer to open an account. If have a co-signed account, both you and the co-signer must agree to any increase in credit limit or other changes to the account terms. This restriction will extend as long as the co-signer is on the account, no matter how old the borrower is. In addition, credit card companies will no longer be allowed to exchange any tangible goods in return for credit card applications collected on college campuses or at college sponsored events. These restrictions will probably make many young people wait until they have passed their teen years before getting their first credit card.
What's Not Included in this Law?
All that great news about what credit card companies must do doesn't mean that everything is perfect. There are still some ways your credit card company can squeeze more profit from you. Here are some things to watch for:
- Switching from fixed to variable rates: Most banks it seems have already switched their users from fixed to variable rates and fixed rate cards are going to be harder to find.
- Increase Existing Fees: Aside from some minor exceptions, this act does not place a limit on the size of fees that banks can charge. Many users have already reported seeing increases in balance transfer fees and late fees from several banks.
- New Fees: Just as airlines have recently discovered new and surprising fees to charge (fuel surcharges, seating surcharges, food and beverage charges, luggage fees, and even fees for using the bathroom) you should expect credit card companies to be equally inventive. You can expect to see annual service fees, fees for issuing paper statements, fees for making payments by phone, or fees for other services that previously were free.
- Reducing Rewards: I would except to see further limitations on how rewards such as mileage or merchandise points can be redeemed and overall, I wouldn't be surprised to see rewards levels reduced or even eliminated for some cards.
How to Object
Keep in mind that not all card issuers will have the same interest rate and fee schedule. If your bank announces some new fee or policy you don't like, you don't have a lot of recourse to make them stop, but you can always take your business elsewhere.
Firstly I would suggest that you call your existing company and (politely) ask for this change to be reversed. In all likelihood, this will be a futile attempt, but it doesn't hurt to ask. You can try to avoid the new fee by not using the service they are now charging for, but ultimately, your best option will probably be to stop using the card for new purchases and pay off the balance under your old terms. In order to avoid a new fee, you may need to inform the company that you do not agree to the modification and then they will most likely close your account. They may, under these circumstances somewhat modify the terms of your repayment. For example they could increase your minimum monthly payment (they can increase your minimum percentage up to twice what you are currently required to pay) or they could require that you pay the entire debt off in five years.
Once a bank closes an account, you may take a hit to your credit report. Most likely, the bank will now report the credit limit as the current balance, which will increase your overall debt to credit limit ratio and will make you look like you max out your available credit. If you open a new card with a large limit, that will in turn reduce that ratio and should help your credit rating (as long as you don't actually run up debt on that new card).
More Information
If you are looking for more detailed information on the changes to credit card regulations, you can find it at the Federal Reserve's website: What You Need To Know: New Credit Card Rules.