Suzanne Gellman, MS, JD
Financial Education Specialist
Credit cards and credit cards with high limits used to be easy to get, but this is not the case anymore.
Credit card issuers are making changes to reduce their risk and increase profits in an uncertain economic time. Banks and credit card companies are trying to offset financial losses by increasing fees and interest rates on credit cards. A new credit card law seeks to help protect consumers: the Credit Card Accountability, Responsibility and Disclosure (or Credit CARD) Act of 2009.
Most of the provisions go into effect Feb. 22, 2010, but a few start in August 2009. The new law will improve consumer disclosures and end some practices costly to consumers, but it does not cap interest rates and fees. Make sure you know the new rules of the game to help level the playing field.
1. Cancelling credit cards. Credit card issuers are “reassessing their risk” and cancelling customer credit cards without notice. They must notify you within 30 days of cancellation if the decision was based on your credit report, but they don’t have to notify you before cancelling your card. They don’t have to give you notice if cancellation is due to inactivity, late payments or default.
2. Reducing credit limits. Many credit card issuers check your credit
report monthly. If they become concerned about your card usage, ability to pay, or amount of debt you are incurring on their card or other cards or loans, they can reduce your credit limit. If you carry a balance, a reduction in your credit limit can negatively affect your credit score (see fico.com).
3. Different interest rates. If your credit card allows you to get cash advances, you may pay one interest rate for credit purchases and a higher rate for cash advances. In the past, credit card issuers usually credited your payments first to the portion of your balance with the lowest interest rate. Under the new law, if you make more than the required minimum payment, the extra amount will be credited first toward the portion of your balance with the highest interest rate.
4. Interest rate increases. Previously, if consumers were late with one or two payments, or if they made late payments on unrelated accounts (known as universal default), credit card companies could raise interest rates on previous balances. Under the new law, card holders must be at least 60 days late before the higher interest rate can apply to an existing balance. The Credit CARD Act eliminates the practice of universal default for existing balances. Borrowers may still have rates raised on future purchases for late payments on unrelated accounts or “anytime for any reason,” but they must be given 45 days’ notice.
5. Fee changes. Common credit card fees include late fees, over-the-limit fees, balance transfer fees and cash advance fees. Under the new law, consumers must be given 45 days’ notice before major contract changes, such as fees, take effect. Cardholders will no longer be subject to overlimit fees unless they permit the card issuer to approve overlimit transactions, and even then, only one overlimit fee per billing cycle can be applied.
6. Fixed and variable rates. Even if a credit card has a fixed rate, it may not be fixed forever. The Credit CARD Act requires card issuers to give customers 45 days’ notice if they change the interest rate on a fixed rate card. For variable rate credit cards, the issuer may change the interest rate without giving 45 days’ notice if the index to which the rate is tied has changed.
7. Teaser rates. Credit card companies sometimes use an introductory or “teaser” rate to get consumers to open an account. A “teaser” rate is a very low rate limited to a fairly short time. At the end of that time, the rate goes up to a standard rate. The Credit CARD Act requires credit card issuers to offer the introductory rate for at least a year.
8. Extra fees. Credit card companies may no longer charge fees to consumers who pay bills over the phone or online. They can still charge fees for expedited payments.