What You Really Need To Know About Credit Card Reform
By Sharon Secor,
LendersMark.org Staff Writer
Due to the efforts of the federal government and the Federal Reserve Board, new credit card rules and regulations are now in effect. While it certainly is important to familiarize yourself with the consumer protections the new rules offer, it is also important to learn what you really need to know about credit card reform – what banks and lenders are going to do to try to recoup profits they lose due to the new regulatory restrictions.
Universal default, in which a late or missed payment on a bill or other credit account can be seized upon as an excuse to raise interest rates is no longer allowed. Interest rate increases and other substantive account changes must be preceded by a written notice of intent, allowing the consumer 45 days to accept the terms or not. If the consumer does not want to accept the new terms, he can close the account and agree to pay off the balance over a period of time, generally with an outer limit of five years.
However, according to the Federal Reserve Board, if a consumer has a variable rate of interest tied to an index and that index goes up, the credit card issuer does not have to provide notice prior to raising the rate. Unless there is a variable interest rate tied to a specific index, a credit card issuer cannot raise the interest rate on a new account for 12 months, except when a payment is 60 days late. That increase of interest rate can only affect new charges, and cannot be applied retroactively to the entire credit card balance. High fee cards, often in the sub-prime category have also had limitations placed on them. The application and annual fees cannot total more than 25 percent of the card’s credit limit.
The new rules also address billing and payment matters. When a consumer pays more than the minimum payment, the amount over the minimum has to be applied to the portion of the balance that has the highest interest rate. Bills must have a regular date, rather than a floating date, and they must be sent out in a timely fashion, 21 days before the due date of the payment. Double cycle billing is no longer allowed, meaning that interest rates can only be assigned to the current billing cycle.
Clarity is an important part of the new credit card protections. Terms and conditions must be expressed clearly. Bills have to include a statement of how long it will take to pay off the balance by paying the monthly minimum and how much per month the payment would have to be to pay off the balance in three years, making a clear demonstration of just how much carrying a balance over the long term costs the consumer.
Making Up The Loss
Credit card lenders are in the business of extending credit to make a profit. Thus, it should not be unexpected that now that new regulations have limited some areas of profit making, lenders are going to seek to recoup those losses in other ways. And, that’s what the consumer really needs to know in order to garner the most benefit from these recent regulatory changes in the credit card industry.
Watch for new fees, such as those associated with cash advance transactions and annual use fees. Some cards may add an inactivity fee, charging for not using the card often enough. Expect late fees to rise. The bottom or floor rate of interest associated with credit cards can also be expected to go up. Many people now have lower credit scores, due to the actions of the banks during the period of time they had to prepare for these changes. Credit limits were cut for many, even those making payments on time, resulting in higher debt to available credit ratios, damaging credit scores and offering an excuse for higher interest rates.
The bottom line, then, is to make sure you know how much your credit is costing you by reading your statements carefully each and every month. It is not unreasonable that credit card companies earn a profit by extending you credit and in the end, only you can determine how much that credit is worth to you – how much you are willing to pay for that credit -- in terms of interest and associated fees. Be an informed consumer of credit and a skilled custodian of your personal finances, and you will make the most of the new credit card rules and regulations.