Financial Education

New federal credit card protections: what you really need to know

By Laura Stack, Chief Financial Officer, Pioneer Services

Credit cards are a paradoxical fact of American life: if used too much they can ruin your credit score for years; if used correctly, they can help establish a solid credit history and increase your credit score. They are required for renting cars and hotel rooms, yet many people may not be able to get one.

In order to bring some simplicity to billing practices and help consumers better understand the good and bad of credit cards, the Credit Card Accountability and Disclosure (CARD) Act took effect Feb. 22, 2010. There are many provisions to it, and it's vital to understand what those provisions are and how they will affect you.

Before looking at your actual bill, it's important to know the changes that won't necessarily show up on your next statement, but are integral parts of how your account will now work.

Interest rates
One of the biggest changes to interest rates is in how they are increased. In the past, an issuer could increase your rate at any time, for any reason. Now, they have to give you 45 days notice before doing so. While the new law itself did not require issuers to give a reason, the Federal Reserve (which is in charge of implementing the law) may require them to provide you with one in the near future.

Another change applies to how any rate increase is applied. It used to be applied to the entirety of your account, but now only applies to purchases you make after the increase goes into effect (previous charges still fall under the old rate).

Also, any new account you open will have its interest rate locked for the first 12 months, with a few notable exceptions:

Variable rate cards that are based on an underlying index—If that index's rate increases, so can the rate on all purchases. For example, if it's based on the prime rate plus a certain percentage, when the prime rate increases, so will yours.

Introductory (or "teaser") rates—If a card has a lower rate for the first six months (for example), and then increases on a specific date, the issuer can raise it.

A customer is delinquent by more than 60 days—A card issuer can increase the rate on all charges if a customer is more than 60 days late with a payment. But once the customer catches up and pays on time for six straight months, the rate has to reset to the original, lower rate.

While the CARD Act does limit how many fees a card issuer can charge the first year (discussed in the "Fees" section of this article), there is no federal APR or interest rate limit currently in place. (Note: The 2007 Defense Authorization Act put into place a national 36 percent APR cap for financial products given to service members and their dependents, but that only applies to payday loans, car title loans, and refund anticipation loans.)

Fees
The most dramatic change with fees is the elimination of unapproved over-the-limit fees. Issuers can no longer charge a fee when you go over your credit limit unless you sign up for such a service, much like overdraft protection at a bank. Instead, the transaction will be denied at the point of purchase.

Card issuers are also banned from charging fees based on how you pay your bill. In the past, you could be charged extra for paying by phone or online in order to get it there faster. While issuers can no longer do that, they can charge a fee if you ask for help from a customer service representative, or would like the payment actually processed faster.

Another consumer-friendly change is that fees for the first year cannot exceed 25 percent of the card's credit limit. For example, if the card has a $500 limit, the fees for the first year cannot be more than $125. This was designed to stop some cards that allegedly had a certain credit limit, but had so many fees applied to the card that, by the time the consumer got it, the actual credit limit was a small fraction of the one advertised.

There is, however, a caveat with this rule: it only applies to standard fees, not "penalty" fees, such as those for late payments. There is also no limit in the CARD Act on the type, or number of, fees an issuer can charge after that first year.

To help address some of these issues, the Federal Reserve is also considering provisions that would:

Ensure that fees do not exceed the dollar amount associated with the consumer's violation of the account terms; if you go $4 over your limit, the fee could be no more than $4.

Ban inactivity fees that punish people who pay off a card, keep the account open, but don't, or rarely, use it.

Prevent multiple penalty fees for a single transaction.

Billing
There are several changes to billing practices, and the way a bill looks. It is now designed to make charges easier to understand, simplify terms and penalties, and even show the dangers of making minimum payments.

As noted earlier, the CARD Act requires issuers to give you at least 45 days notice of any rate increase. It also requires them to give you a similar notice of any new or altered fees, or other changes to your account.

Issuers must now send your bill at least 21 days before the due date, rather than just a few days. The goal is to reduce late fees that were not the fault of the consumer.

The due date must be the same each month, so that consumers can adequately budget and know when their payment is due.

If you make a payment over the minimum amount, that extra money must first be applied to the balances with the highest interest rate. For example, if you have a cash advance at a 20 percent rate, and purchases are at 10 percent, your extra payment will go toward paying down the cash advance balance first.

Issuers can only factor interest for the average balance in the past 30 days, not the past 60 (which was called "double cycle billing"). Consumer advocates say this change alone will save billions of dollars each year.

The way your bill looks will also be different:

All fees and interest will be easy to read (usually bolded) and terms must be spelled out clearly, in an easy-to-read font.

It will list a running total of fee and interest charges for the year.

The "Late Payment Warning" will clearly spell out the fee and/or charges of a late payment.

A section called "Minimum Payment Warning" will inform you (or provide an example of) how long it will take to pay off the card if you just make minimum payments.

Another section will list any upcoming changes to your account, or ones that were made in the past cycle. This is where notification of any fee or interest rate increases will be located.

Moving forward
There are many provisions and rules in the new CARD Act—more than can be summed up in this article. If you're a credit card holder, the best thing you can do is educate yourself about these new rules. In fact, the Federal Reserve has a site designed to do just that, and it's a good idea to bookmark it for future reference.

If you feel overwhelmed with credit card debt, consider visiting a financial professional or counselor who can help you organize, prioritize, and pay down your debt. If it's too much to handle, consider getting a debt consolidation loan. Doing so adds variety to your credit choices (which helps your credit score), and gives you a set monthly payment and payoff date.

In the end, it's up to you to make sure you use credit cards responsibly. As with any debt, paying the bill on time, and as much over the minimum as possible, is the best way to the get the most benefit out of your card, without getting the most headaches in the process.

About the author
Laura Stack is Chief Financial Officer for Pioneer Services, a Division of MidCountry Bank. She has more than 20 years experience in finance in the financial services, leasing and media sectors. She is a member of several professional and military organizations, including Financial Executives International and the Association of the United States Army, and is a published author of several financial education articles.

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