New Credit Card Laws

In December 2008, Congress passed new credit card laws to change many practices of the credit card industry which had been seen as unfair to cardholders. Bill Hardekoph, CEO of LowCards.com, a credit card consumer education website, and author of The Credit Card Guidebook, gives us the highlights of how the legislation will help cardholders. He pinpoints the key changes which cardholders can expect and gives tips on how cardholders can take advantage of these new laws.

Interview with Bill Hardekoph of LowCards.com

Why were the new regulations necessary?

The regulations make the relationship between the issuer and the credit card consumer more balanced and fair for the consumer. It had become too easy for the card issuer to raise rates at any time for any reason, with only a 15-day notice, and to make changes that unfairly penalized the consumer. Now, a number of these practices have been curtailed and it should be better for the consumer.

What is the good news for cardholders in this credit card reform legislation?

These changes will help the cardholder in several ways:

• More time to pay their bill - Cardholders will now have 21 days to pay their credit card statement.
• Scheduled interest rate increases – Cardholders will know when to expect an interest rate increase. Issuers may increase rates at the end of a specified period, providing the rate increase was disclosed at the opening of the account.
• More notice on rate increases – Card issuers have to give consumers 45 days notice of any changes in their account rather than the current 15 days.
• Elimination of two-cycle billing – Card issuers can no longer split the month and charge two different APRs on the same billing statement.
• Savings on interest paid – Cardholders can pay off highest balances faster. Before the new laws, card issuers could apply any payment above the "minimum" to the balance with the lowest interest rate. This meant higher interest payments for cardholders. The new laws require card issuers to apply a payment to the part of the balance with the highest interest rate or apply the payment proportionally to all balances.
• Elimination of excessive fees on cards for cardholders with poor credit histories - The fee will be capped at 50 percent of the credit limit. Fees exceeding 25 percent of the credit limit must be spread over no less than six months, rather than charged as a lump sum.

Will these required changes help cardholders pay off their credit cards faster?

Yes. Cardholders who had been billed using two-cycle billing will save some money on interest. They can pay off their balance slightly faster now that their payment will not just be applied to the balance with the lowest interest rate. Cardholders with lower credit scores may not see such high fees added to the balances.

When can cardholders expect to see these changes?

Unfortunately, card issuers have until July of 2010 to implement these changes. Issuers can institute them earlier; but, they are not mandatory until July 2010.

Won’t these new credit card laws cause banks to make other changes to improve their profits?

Issuers are not happy with these regulations because it takes away a significant amount of their freedom to make changes in a cardholder's account. We expect that it will be much harder for people with less than average credit to get approved for a credit card. In order to minimize their risk, we are already seeing banks slash the credit limits on a number of their customers.

We are also seeing a number of changes in the introductory rates on credit cards--the days of the "zero percent interest for 12 months" introductory offer has given way to a time period of six or even three months, and some issuers have changed the zero percent to 2.99 percent or 3.99 percent as an introductory rate. The lower credit limits, combined with an uncapped (no maximum amount) 3% balance transfer fee, may be disappointing for many consumers who are looking at balance transfer offers as a way to pay off high balances with high rates by transfering balances to lower rate credit cards.

Can we expect more credit card reform legislation?

Congress will continue their attempt at credit card reform and may pass new credit card laws. We expect Congress to try to create legislation that puts restrictions on marketing that targets teenagers and college students, and put caps on interest rate increases. They may also try to limit fees for telephone or electronic payments, and cap the number of over-the-limit fees that credit card companies are allowed to charge. Update: On May 22, 2009 "The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009" was passed including new legislation on these consumer and several other card reform issues. Credit card issuers have until August 2010 to implement this new CARD Act of 2009.

What You Can Do

Here are a few tips from LoveToKnow Credit Cards on how you can be a smart credit card consumer as the new credit card laws are implemented:

• Improve your credit score - It will take very good credit to get approved for a new credit card, get a credit line increase or to lower your APR.
• Pay more on your credit card balance – Apply the money you save on interest to pay down your balance.
• Read Change in Terms notices – You will be notified 45 days before any fee or interest rate changes. Cancel the card if you don't want to pay the increased interest charges.
• Make payments on time – Late payments can result in a late payment fee and a reduced credit score.
• Minimize your credit risk – A declining credit score or an increasing level of debt can signal increased risk to a credit card issuer, resulting in a potential increase in your APR.
• Budget for potential rate increases – Read the Terms and Conditions for your card to learn when the interest rate might be increased.

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