What the new credit card reforms mean for you

Federal regulators have approved a sweeping set of credit card regulation reforms that go into effect July 1, 2010. What will the credit card industry rules mean for cardholders?

Millions of credit card users will avoid retroactive interest rate increases on existing card balances and have more time to pay their monthly bills, greater advance notice of changes in credit card terms and fewer penalty fees, late charges and interest payments.

The changes — the most significant in nearly three decades — will fundamentally change the way credit card issuers market, bill and advertise credit cards. Bankers say the rules will lead to higher interest rates and a significant reduction in the amount of credit available to all consumers — even those with good credit.

“Basically, riskier borrowers will be subsidized by people who manage their credit well,” says Nessa Feddis, vice president and senior counsel for the American Bankers Association, a leading industry trade group. The largest card issuer in the United States, Chase, predicts that the average annual percentage rate will rise by nearly 2 percentage points.

Lauren Saunders, a managing attorney for the National Consumer Law Center, praised regulators for adding consumer protections: “They were under a lot of pressure to weaken these rules. We’re especially pleased that they hung tough on the rules prohibiting retroactive rate increases for people paying their bills every month. That was the most important rule.”

Here are the highlights of the final rules:

Limited interest rate hikes: Interest rate hikes on existing balances would be allowed only under limited conditions, such as when a promotional rate ends, there is a variable rate or if the cardholder makes a late payment. Interest rates on new transactions can increase only after the first year after issuers give 45 days’ advance notice of the change.

No more universal default: “Universal default,” the practice of raising interest rates on customers based on their payment records with other nonrelated credit issuers (such as utility companies and other creditors), would end. Some large credit card issuers have already voluntarily discontinued this practice.

More time to pay monthly bills: Credit card issuers would have to give card account holders “a reasonable amount of time” to make payments on monthly bills. That means payments would be due at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or are moved up, giving them less time to pay their bills and increasing the likelihood of late fees.

Clearer due dates and times: Credit card issuers would no longer be able to set early morning or other arbitrary deadlines for payments. Cut-off times set before 5 p.m. on the payment due dates are “unreasonable,” according to the Fed. In addition, “Creditors that set due dates on a weekend or holiday but do not accept mailed payments on those days would not be able to consider a payment received on the next business day as late for any reason.”

Highest interest balances paid first: When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first or divided on a proportional basis. Current industry practice is to apply all amounts over the minimum monthly payments to the lowest-interest balances first — thus extending the time it takes to pay off higher-interest rate balances.

Limits on over-the-limit fees: Over-the-limit fees would be prohibited if consumers exceed their credit limits because holds or blocks are placed on their credit cards. This often affects people who reserve rental cars or hotel rooms because merchants may place holds on credit card accounts for the total amount of purchase plus a deposit. While a hold is in effect, the amount of available credit on the account is reduced. It may take several days or a week or more to release these holds and consumers close to their credit limits may be hit with over-the-limit fees when they try to make additional charges.

No more double-cycle billing: Finance charges on outstanding credit card balances would be computed based on purchases made in the current cycle rather than going back to the previous billing cycle to calculate interest charges. So-called two-cyle or double-cycle billing hurts consumers who pay off their balances in full in one month but not in the next. They are hit with finance charges from the previous cycle even though they have paid the bill in full.

Clearer credit terms. Credit card applications, monthly statements and other materials would clearly display terms in reader-friendly boxes with large type. Credit card issuers would have to disclose the consequences of only making minimum payments each month — namely, that it will take much longer to pay off the credit card balance. Issuers also must eliminate the use of the term “grace period” on credit card applications and solicitations. Instead, the phrase “how to avoid interest” or similar wording would have to be used. The term “fixed rate” card can only be used if the rate will not change for a specified period, as long as the payments are current. Monthly statements would also carry boxes that provide year-to-date totals on the amounts paid in fees, interest and other charges. (See: Interactive look at what new monthly credit card statements would disclose.)

Subprime credit cards for people with bad credit: People who get subprime credit cards and are charged account-opening fees that eat up their available balances would get some relief under the rules. The practice — called fee harvesting in the industry — would be banned if issuers charge upfront security deposits and fees that are more than 50 percent of the credit limit. Also, fees that exceed 25 percent of the available credit limit must be spread over the first six months of card use, rather than piled on at the beginning.

In addition, oral disclosures — such as telephone pitches for credit cards — would have to include information about how much available credit would be left on a credit card if upfront account opening fees are charged and those fees are more than 25 percent of the credit limit. This impacts people with bad credit who apply for subprime credit cards. Consumers often find out — after the fact — that a $500 credit limit has been reduced to only $100 after security deposits and other fees are charged before the card is used for the first time. In addition, the rule would allow subprime cardholders an opt-out option “if the consumer has not used the account or paid a fee …”
Credit offers: When advertising or marketing credit cards to consumers, issuers would have to disclose the factors that will determine which interest rates or credit limits potential customers will receive. This would help to eliminate the surprise some consumers experience when they are teased with low interest rates in ads but end up with much higher interest rates when they actually apply for the credit cards.

Foreign transaction fees. Any fees charged for purchasing goods or services in a foreign currency or for using the credit card outside of the United States would have to be disclosed in a table on credit card applications and solicitations — not just when the account is initially opened.

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