Last year Congress passed the Credit CARD (Card Accountability, Responsibility and Disclosure) Act, with the final changes taking effect Aug. 22, 2010. The idea behind it, according to Kevin Gallegos, vice president of Freedom Debt Relief, is to regulate how credit card lenders charge and communicate with consumers. So what does this mean for you?
"Generally, the new law should provide great relief to consumers. It requires credit card lenders to make terms, rates and fees much clearer and it eliminates the surprise interest-rate hikes that have caused headaches for cardholders in the past years." Good news, right? For the most part, yes. But experts agree that even though plenty of the changes are helpful, the new law isn't a carte blanche to be lax about your credit cards—now more than ever, you need to look out for hidden dangers. Read on to learn about the changes and how to make the most of them.
Before the Act, credit card lenders could raise cardholders' interest rates at any time. Now, credit card companies must give you 45 days’ notice for new rates, and you can choose to close your card to avoid the rate hike.
But keep in mind… "If your card is based on a variable APR, as many are now, your interest rate can climb as the prime rate goes up, without any 45-day warning," says Laura Rowley, an expert at Yahoo! Finance. She also warns cardholders to look past an enticing introductory "teaser" rate—it may seem great at first, but take note of how high the rate will climb once the introductory period expires. According to Hollis Colquhoun, coauthor of "Women Empowering Themselves: A Financial Survival Guide," the two biggest components of your credit score are your payment history and your credit availability. So if you do choose to close a card that is carrying a balance and transfer that debt to another card, your available credit will decrease, and that can affect your score. “It takes discipline to have, but not use, a card if the terms become onerous. So you need to assess your own behavior,” she says.
More reasonable billing cycles
In the past, credit card companies could change payment due dates at will. "They weren't necessarily at the end of the month and they weren't necessarily a certain number of days from when the statement was mailed out," says Colquhoun. Now, card issuers have to allow at least 21 days from when they mail out the bill for the payment to be due, and the due date will be the same each month. "This means it will take longer before late charges begin to accrue and you have a more reasonable time frame in which to pay," says Gallegos.
But keep in mind… Credit card companies can still lower the limit on your cards, pretty much at will. "If they get the idea that your situation has changed or that you're spending in a certain way, they do have that power over you," says Colquhoun. So monitor how much you can spend on each card, or you risk going over your new limit.
Relief on late payments
If you make a late payment, you won't necessarily be faced with the same brutal charges as before. According to Gallegos, the Act requires card issuers to wait until payments are 60 days late before charging penalty interest rates. "Additionally, card issuers cannot raise interest rates on their card just because you were late on another card."
But keep in mind… Even though restrictions have been softened, paying your bills on time should be a priority. "Consumers really need to focus on paying down their credit debt completely. You want to live your life with zero credit card debt—not just because it's good for your finances in the abstract, but because you could really get pinched by what's going on with these changes," advises Rowley.
Lower penalty fees
Penalty fees for missed or late payments used to average $39. Now they're limited to $25 (though if you've had another late payment in the past six months your fee could reach $35). Also, your fee cannot be more than your minimum payment.
But keep in mind… "This does not mean consumers can get lazy about paying on time. Late payments still damage credit scores, a second late payment will result in more fees, and they indicate problems managing credit," Gallegos warns.
Restrictions for young users
If your child is under 21, he or she will need to provide either a cosigner or proof of income to open a credit card account.
But keep in mind… While building a good credit history is important, so is knowing how to handle cards responsibly. Just because a cosigner is required to open an account doesn't mean kids are protected. "Of course a kid can get a friend who's 23 to cosign even though neither of them knows what he’s doing," says Colquhoun. “The key is to educate students about credit cards and explain that it's debt, not free money. Going through the numbers about paying minimums, paying the interest and what an item ultimately costs when you add everything up can be eye-opening.” And explain that if a student is under 21 and asks a friend who is older to cosign for a card, then that friend will be equally responsible for the debt.
No more inactivity fees
People who use their card for emergencies only won’t incur a fee for not actively making charges.
But keep in mind… "Lenders can still close an unused account," says Gallegos. "If keeping a certain card is important, you should make sure to charge and pay off occasional small purchases to keep the card active."
Consumers who automatically had overdraft protection on their card, which allowed them to draw money past their limit but pay a fee, now have the ability to opt out of it. It's not just given to them (along with the high fees) without their knowledge. And new holders get to choose whether they want to opt in or not.
But keep in mind… Having more control over your options also means being more vigilant. "Because credit cards have to educate you now, you really need to open and read everything," says Colquhoun. And since many of the bank mailings can look like promotional materials, it's essential to commit to reading everything so you have the information you need.
No regulations on business cards
This is where experts caution cardholders to be especially wary. None of the regulations from the Act apply to business or small business credit cards.
But keep in mind… "Because unemployment is so high, many people are starting their own businesses as a way to make more money, so they're getting issued small business cards," says Colquhoun. In this case, since a small business card is essentially a personal card (because the person whose name is on it is responsible for the debt), you're much better off going with a personal card to reap the rewards of the Act.