Get ready for a consumer milestone. On February 22, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 (which Congress passed in May) takes effect, ushering in long-overdue protections for consumers. So, for once, a letter from your credit card company announcing policy-changes may bring good news. In fact, it’s projected that the Credit CARD Act, which builds on recent steps taken by the Federal Reserve to improve disclosures and end unfair lending practices, could save consumers as much $50 billion annually.
If you are one of the nearly 80 percent of American families who have a credit card, and 44 percent of families who carry a balance, what’s in the new law for you? Key elements of the Credit CARD Act include:
- A ban on unfair rate increases. The new law eliminates rate increases on existing balances due to “any time, any reason” or “universal default” and severely restricts retroactive rate increases due to late payment. Further, in the past, your interest rate could change with a 15-day notice whereas now are entitled to a 45-day notice of any rate change. Also, starting on February 22, your rate on existing balances can be raised only if you are more than 60 days late on your payment. Additionally, if you are 60 days late and the company increases your interest rate, if you then make at least the minimum payment on time over the next six months, your existing balances can return to the original, lower rate.
- First year protection. Contract terms now must be clearly spelled out and stable for the entirety of the first year. Credit card companies may continue to offer promotional rates with new accounts or during the life of an account, but these rates must be clearly disclosed and should last at least six months.
- Enforcement of a fair interest calculation. Previously, if you had two balances at different interest rates and sent in a payment for more than the minimum due, your extra amount would not be have been directed to the balance with the higher interest rate. The new law says if you have two balances, for example, one at 3.99 percent and another at 10.99 percent, and you make a $250 payment when the minimum due is $100, your additional $150 must go toward paying off the higher-rate balance, thereby reducing what you ultimately pay in interest costs. The law also ends the confusing and unfair practice by which card issuers use the balance in a previous month to calculate interest charges on the current month, so called “double-cycle” billing.
- Longer grace periods. In the past, consumers had 30 days to make a credit card payment. Over time, that dwindled to 25 or fewer days. The new law stipulates at least a 21-day grace period from the date your bill is delivered. It also ends late-fee traps, requires that your due date be the same date every month, and specifies that your payment cannot be considered late if it is delivered on a non-business day like the weekend. The act also bans deadlines that fall in the middle of the day.
Additionally, the Credit CARD Act makes it easier to avoid over-limit fees because institutions now have to obtain a consumer’s permission to process a transaction that would place an account over the limit. Fees on sub-prime, low-limit credit cards also have been substantially restricted. Additionally, the act enhances disclosure on fees for gift and stored value cards and restricts inactivity fees unless the card has been inactive for at least 12 months. Also important are new protections for college students and young adults, including a requirement that card issuers and universities disclose agreements with respect to the marketing or distribution of credit cards to students.
Responding to consumers’ complaints that it is often difficult to understand contract terms, the Credit CARD Act includes Plain Sight /Plain Language Disclosures that require creditors to give consumers clear disclosures of account terms before they open an account, and clear statements of ongoing account activity. For example, pre-opening disclosures will highlight fees you may be charged and periodic statements will conspicuously display fees you have paid in the current month and year-to-date—as well as the reasons for those fees. Importantly, card issuers also are required to display on your periodic statements how long it would take to pay off the existing balance—and the total interest cost—if you paid only the minimum due. Issuers will also have to factor and display the payment amount and total interest cost to pay off the existing balance in 36 months.
Finally, to ensure accountability from both credit card issuers and regulators who are responsible for preventing unfair practices and enforcing protections, regulators will be required to report annually to Congress on their enforcement of credit card protections and to request, on a biennial basis, public input to determine if regulations or disclosures might be needed. Card issuers that violate the act’s new restrictions will face significantly higher penalties than in the past.
Check your credit
You might use the Credit CARD Act’s February 22 launch as the day to check your credit report, a once a year must. You can request reports for free once a year through any of the three major credit agencies: Equifax (800-685-1111), Experian (888-397-3742), or TransUnion (800-888-4213). Alternatively, you might choose to pay for a consolidated report that presents data from all three agencies. For example, zendough presents your credit report in easy-to-read printable and downloadable formats, making it easier for you to review and spot errors.
Chiefly, you’ll want to look for fraudulent charges or new accounts because identity thieves often change your address or pay the minimum balances on new accounts they have opened under your name to avoid calling attention to the account. Conveniently, there’s information right on the credit report on how to report errors to the credit bureaus.
If your score is lower than you expected, you can make improvements by getting and staying current, keeping balances low, and paying off debt rather than moving it around. Keep in mind, however, that it is inadvisable to close all your unused credit cards and keep just one with a balance because what you owe will be a greater percentage of your credit limit, something that lowers your score. Also, keep your oldest card, even if you have a zero balance, because having had credit for a longer period of time increases your credit score. Even if your first credit card has an astronomical interest rate, use it every now and then for small purchases and pay it off in full when you get the bill. Finally, don’t open numerous accounts that you don’t need as a flurry of new account openings can decrease your score.
To avoid credit report problems in the first place, when applying for new credit, use the same name (with your middle initial if you use one, etc.) provide your Social Security number, and list your previous addresses for the past five years to help link together pieces of your credit history and reduce the possibility of errors.
Remember, contrary to public opinion, checking on your credit does not lower your score. So pledge to stay up-to-date both with your credit card companies’ new policies and your credit history. A little effort today could save you some major headaches down the road.