A new report explains how the rules adopted under the CARD Act have affected the cost and availability of credit card lending. The Center for Responsible Lending says these rules did not reduce credit card lending by banks. It also says banks did not raise the cost to borrow money on credit cards. These are important findings because many banking industry and some consumer advocates warned the rules would make credit harder to get and more expensive.
According to the report, the CARD Act rules have made credit card pricing more transparent. This has lead to increased price competition among lenders, meaning lower rates for consumers. The report also says the gap between the rates consumers are offered and the rates they actually are charged has narrowed because of this transparency.
New credit card rules took effect August 22, 2010 in the third phase of reforms passed by Congress under the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act). These protections include:
- Reasonable penalty fees. Late payment fees or other penalty fees can't be more than $25 unless one of your last six payments was late or your credit card company shows it incurred higher costs because of the late payment. Also, penalty fees can't be higher than your minimum required payment.
- No inactivity fees. You can't be charged for not using your credit card.
- One-penalty fee limit. You can only be charged once for a late payment or other event that violates your credit agreement.
- Explanation of rate increases. Your credit card company must explain any increases in your credit card's Annual Percentage Rate (APR).
- Re-evaluation of rate increases. Any APR increases must be re-examined by the credit card company every six months, and the rates must be lowered if appropriate.
- Gift cards last five years. The money on your gift card is good for at least five years from the day it's purchased. You can't be charged an inactivity fee for not using the card the first year.
The new credit card rules provide significant protections for consumers. But some economists say the rules have pushed credit card interest rates up to their highest levels in nine years. Companies responded to rules limiting penalty fees and restrictting sudden rate increases by upping general interest rates. In 2010, the average interest rate on existing cards reached 14.7 percent, the highest level since 2001.
In July 2010, new rules will go into effect that will finally give credit card holders some much needed relief from rapidly changing credit card terms and unfairly imposed late fees and penalties.
The Federal Reserve has approved many new changes to protect credit card holders who have been at the mercy of credit card companies that have been unilaterally changing terms and retroactively hiking interest rates. Highlights include:
- A limit on interest rate increases
- Payments go to balances with the highest interest rates first
- An end to universal default
- Additional time to make payments
From 0 to 25 - Stop the Interest Rate Hikes!
You're approved for a low-interest or even zero percent credit card and before you know it, the interest rate is tripled, and you have already run up a balance on the card. The minimum payment has increased to an amount that threatens to break your budget.
Worry no more! When the new rules go into effect, credit card companies won't be allowed to raise interest rates on new transactions during the first year, except under limited circumstances:
- The rate increase was disclosed to you when you opened the account
- The card has a variable rate
After the first year, the credit card company may only increase the interest rate on new transactions if they give you 45 days' notice of the change. In addition, interest rates on existing balances can only be raised if the minimum payment is received more than 30 days after the due date.
Higher Interest Balances Paid First
Most credit card companies assess different interest rates on your account depending on the type of transaction. Generally, cash advances are assessed the highest rate, followed by the regular purchase rate, and promotional offers carry the lowest rate.
Currently, payments you make above your minimum amount due are credited to the balance with the lowest rate first, until that balance is paid in full. In the meantime, the balances with the higher rates are paid last. For example, if you take a cash advance, and continue to use the card for purchases at the regular purchase rate, the high interest cash advance balance may never be reduced.
Under the new rules, any payments you make above your minimum amount due will go to the higher interest rates first, or will be distributed among all balances proportionately. No longer will credit card companies be able to maintain your higher interest balances indefinitely.
Universal Default Eliminated
Universal default refers to the practice of credit card companies raising interest rates on a cardholder based on the their payment history with a different creditor. So, even if you pay your credit card "A" bill on time every month, if creditor "A" finds out you defaulted on your credit card "B" account, creditor "A" may consider you a risk and raise the interest rates on your credit card "A" account. The new rules eliminate this practice.
More Time to Make Payments
The new rules eliminate an unfair practice whereby credit card companies send out their bills with a due date that gives the cardholder very little time to make the required payment. Of course, if your payment is received late, a significant late fee is added to your account balance.
When the new rules go into effect, credit card companies will have to give cardholders a reasonable amount of time to make their payments. The rules require companies to give cardholders at least 21 days from the date the bill is mailed or delivered to make their payment.
In the Meantime
The Federal Reserve has given credit card companies until July 1, 2010 to implement these new rules. In the meantime, you should make sure you protect your credit score by paying your monthly payment on time. If you get a notice that your interest rate is about to be increased or your credit limit reduced, contact the credit card company and ask about your rights to opt out of the changes and cancel the card.
If you are already dealing with a high interest rate card, try to pay down your credit card balance and stop using it. If you qualify, transfer your high interest balance to a zero interest card to give you some time to pay off your debt without accruing additional interest. However, most of the time you only get a short time period for the zero-interest before a higher rate applies. Read the fine print.