Benefits and Loopholes of the New Credit Card Act

Photo by moofbong

Are you being nickled and dimed by your credit card company? Congress has finally done something about it. Although many loopholes remain, some problems will be eliminated by the Credit Card Accountability Responsibility and Disclosure Act, (CARD Act) which takes effect Feb. 22.

Thanks to the CARD Act, unexpected rate hikes, over-limit fees and double-cycle billing and other rip-offs are history. The new rules for credit-card issuers are arguably the most consumer-protective in the history of credit cards, dealing with scams that have trapped millions of consumers into ever-mounting debt.

Credit issuers have mailed out change-of-terms notifications that explain the details in recent weeks, but since many of us don't read all the fine-print sent to us, here are the key changes put forth by the law. We've also included some notable exceptions that may require further legislative attention.

1. Finance Charges, Interest-rate Hikes and Notifications

• No interest-rate increases for the first 12 months after opening an account.
• Rate increases can only be applied to new charges.
• Annual and application fees cannot exceed 25 percent of your initial credit line.
• No more double-cycle billing, (charging interest on your current billing cycle and the previous one. Even though you may have paid your previous balance in full, you are still charged interest on it.)
• Promotional-rates available for a minimum of six months.
• No more over-limit fees, unless the card holder opts in.
• No fees to make credit-card payments online or over the phone, unless you make a payment on the due date.
• Must give 45-day notice of pending rate or fee hikes or any other significant changes to credit-card terms.
• No more rate increases on existing balances due to "any time, any reason" or "universal default"
• Severely restricts retroactive rate increases due to late payment.
• Contract terms must be clearly spelled out and stable for the entirety of the first year.

Loopholes

• Rate hikes may be applied if you're more than 60-days late with a payment.
• Some banks are skirting the law by increasing card users’ regular interest rates up to 29.9 percent and then refunding part of that rate for each month you pay on time.
• Although prohibited, double-cycle billing can technically still be applied to credit cards that don’t have grace periods.
• Issuers can suggest card holders opt-in for over-limit fees in exchange for lowering the fee.

2. Billing Statements, Payments and Disclosures

• Billing statements must be sent 21 days before the due date.
• Your due date should be the same date each month.
• Payments are considered on time when received by 5 p.m. on the due date or the next business day after a holiday or weekend.
• Payments above the minimum must be applied to the highest-rate balance first.
• Each monthly statement must include information on how long it would take you to pay off your balance if you make minimum payments only and the total you’ll pay, including interest and principal; and how much you need to pay each month in order to pay off your balance in 36 months and the total you’ll pay, including interest and principal.
• Statements must also include a warning that by making only minimum payments you will pay more interest and it will take you longer to pay off your debt, as well as a toll-free number to call if you want to be referred to a credit-counseling service.
• No late-fee traps. Issuers must give card holders at least 21 calendar days from time of mailing to make payments. Also eliminates weekend deadlines, due dates that change each month, and deadlines that fall in the middle of the day.
• Credit card companies must apply excess payments to the highest interest balance first.
• Institutions must obtain a consumer’s permission to process transactions that would send an account over their allowable limit.
• Substantially restricts fees on subprime, low-limit cards.

Loophole

The Act doesn't deal with “Deferred-interest” Plans (such as “No interest for six months”), which allow companies to charge interest retroactively if the balance isn't paid in full after the promotional rate expires. Many believe these plans should be banned as false or coercive advertising.

3. College students and young adults

• No credit cards issued to college students unless co-signed by a parent or the applicant can demonstrate “ability to pay.”
• No credit-limit increases if you're under 21 and have a co-signer, unless the co-signer grants permission.
• No predatorial marketing and freebies on college campuses.

Loopholes

• Co-signers may remain on the account after a student graduates. In essence, the co-signer could be liable for payments the entire time the younger person holds the card.
• Issuers will likely start appealing to parents to co-sign their children’s credit cards. And the Federal Reserve has specified that issuers have the option of keeping the parent on the hook even after the young person turns 21, Wu says. “If that younger person keeps the credit card for 20 years, the co-signer is liable that whole time.”
• Issuers can continue predatorial practices off campus.