How new credit card reforms may help your bottom line
The Credit Card Act of 2009 includes several changes that will benefit U.S. consumers. But there's a catch: credit card companies are not giving up without a fight...
A new law in effect since Monday aims to prevent some of the more predatory policies credit card issuers are notorious for doling out to consumers. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 includes several changes that will benefit U.S. consumers with credit cards. But there’s a catch: the credit card companies are not giving up without a fight.
In response to the new law, also called the Credit CARD Act of 2009, credit card issuers have spent the nine months between the signing of the act and the implementation of it creating new rules of their own in an effort to recoup some of the losses in revenue they will undoubtedly see in the coming months.
Approximately 46 percent of American households were living with credit card debt in 2007, and that number has probably climbed since the record-high unemployment rates and number of foreclosures in the past year alone. With the faltering economy at the forefront of American’s minds, President Barack Obama signed into law what some finance experts say will level the playing field between consumers and credit card lenders.
“You can be a high school drop out or [hold a] Ph.D and still have a lot of difficulty getting through the 17 pages of tiny font type on your credit card bill before this legislation took effect,” said White House senior economic advisor Jared Bernstein, who is also the executive director of Vice President Joe Biden’s task force on the middle class. The main goal is to provide “consumer protection, particularly in an area where it’s pretty ripe for exploitation,” said Bernstein.
Benefits To Consumers
Perhaps the new policy most visible to consumers, especially those with credit card debt, will be a more detailed credit card statement. Credit card statements are now required to include a breakdown of how long it will take to pay off balances if minimum payments are made. Specifically, it will show consumers how much would need to be paid monthly to pay off the balance in three years. Other benefits include:
*An “opt-in” policy that requires creditors to get permission from consumers before charging fees for over the limit purchases. If consumers exceed their credit limit and do not opt-in, their card may be declined for any above limit transactions. If consumers do not opt-in and the creditor allows a transaction to go through, no over limit fee can be charged.
*Interest rate increases during the first year after an account is opened is now generally prohibited, as are rate increases applied to existing credit card balances.
*Creditors are no longer able to issue credit cards to consumers under age 21 unless the person has the ability to make the required payments or obtains a signature from a parent or cosigner who can.
“I think what the provisions do is for those who have credit cards who have been aware that there are changes, it puts us more in control of what credit card companies can do for us,” said Dr. Rhonda Sharpe, associate professor and director of financial literacy at Bennett College for Women.
Credit Card Companies React
Under the Credit CARD Act, credit card companies are still allowed to impose certain rules on cardholders, but must send out a notice 45 days before implementing any of the following:
*Changes to annual fees, late fees and cash advance fees
*Increases to interest rates
*Other significant changes in card terms
But creditors do not have to send out 45-day notices for these changes:
*The card has a variable interest rate that is tied to an index
*The introductory card rate has expired and changes to the previously disclosed new rate.
*The interest rate goes up since the consumer is in a “workout agreement” and has not made payments as agreed.
While it is argued that minorities often face more predatory lending in trying to get access to credit, many getting it through subprime lenders, statistics show that when it comes to credit card debt, race is a not a big factor. Nonwhites and Hispanics with credit card debt account for only 3.3 percent more than white non-Hispanics, according to the Federal Reserve Board 2007 Survey of Consumer Finances.
“Frankly I don’t buy that argument in its entirety; I’m hearing from scores of White Americans, Latinos, Asians across the country who have been just as impacted by the credit crunch and by changes from their banks and lenders as have been African-Americans,” said personal finance expert Lynnette Khalfani-Cox.
In the struggle to keep credit card debt at bay and credit scores stable, there are some things you should and should not do.
If your credit card company starts to impose annual fees or other kind of fees, don’t rush to close your credit card account. Consumers should think twice before closing credit card accounts they have had open for years; credit ratings look favorably on long account histories, generally speaking. “I’m advising people to wait until the dust settles a little bit,” said Cox. “The potential hit to your credit rating could have such negative consequences that it might far outweigh any benefits you’ll get from simply not paying a $50 annual fee.”
For the unemployed or those in severe debt, Cox suggests learning the difference between tweaking and overhauling your budget, and working accordingly. Cox defines tweaking a budget as cutting down on extra treats like dinners out and movies, while overhauling requires considering whether essential needs such as housing or transportation should be downsized to cut down on big bills.
“If you’re unemployed, you have to think about overhauls to your budget—those are major changes and lifestyle changes,” said Cox.
Get educated: be aware of the new laws. For more information on new credit card provisions go to http://www.federalreserve.gov/consumerinfo.
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