How you can BENEFIT from New Credit Card Rules

If you have ever faced an unexpected rate hike on your credit card, a change to your monthly due date that came without notice or an excessive fee for a payment you made one day late, the new Credit Card Accountability, Responsibility and Disclosure (CARD) Act may deliver welcome relief.

Through this legislation, the federal government is trying to make the relationship between card issuer and user more balanced and fair for the consumer.  For one, this means credit card issuers can no longer raise interest rates at any time or for any reason after providing minimal notice.  In addition, they can no longer make other changes that unfairly penalize consumers.

The CARD Act curtails a number of unjust practices that have been troubling card users for years.  Some of the highlights include:

• More time to pay your bill :: Your credit card issuers must give you at least 21 days to submit your monthly payments.
• Clearer due dates :: Late-fee traps, such as weekend deadlines, due dates that change each month and payment deadlines that fall in the middle of the day, are no longer allowed.
• Limited interest rate increases :: Your interest rate cannot increase within the first 12 months of opening your credit card account.  In addition, card issuers generally cannot apply a rate increase retroactively to your existing balances, unless the increase is due to the expiration of a promotional rate, the stated rate is a variable rate or you make a late payment.
• Advance notice of rate increases :: Your card issuers must notify you at least 45 days (rather than the previous 15 days) in advance of any changes to the interest rate or other terms for your card.
• Elimination of double-cycle billing :: Credit card companies no longer can use your balance from the previous month to calculate interest charges for the current month.  Previously, even if you paid off your balance monthly, you could have been hit with finance charges computed from the previous cycle.
• Higher-interest balances paid first :: If you have balances subject to different interest rates (e.g., cash advances vs. regular purchases), your credit card company must now first apply any extra payments you make toward the highest-interest balance.  Previously, card companies typically applied amounts exceeding the minimum monthly payments to the lowest-interest balances first, thereby extending the time it would take to pay off higher-rate balances.
• Improved communication :: The new legislation requires credit card issuers to display on your statement how long it would take you to pay off your existing balance, and the total interest you would end up being charged, if you only pay the minimum amount due.  Your statement also must provide the payment required, including the interest component, to pay off your balance in 36 months.
• Limits on students :: The days of easy credit for college students are over.  Consumers under the age of 21 must have an adult cosigner to obtain a credit card or be able to show they can repay the debt. In addition, college students must receive permission from parents or guardians to increase the credit limit on their joint accounts.

Some unintended consequences
Unfortunately, there are a few drawbacks to the new CARD Act — many of which were experienced by consumers in 2009 as companies tried to offset the impending legislation by changing their credit card terms. And industry analysts and credit card companies warn of additional potential drawbacks as providers attempt to recoup some of the revenue they expect to lose as a result of the new credit card rules.

In particular, most card issuers have already begun to:

• Charge annual fees or raise other fees, such as balance transfer charges
• Cut back on rewards and perks, such as cash back, airline miles and hotel points
• Raise interest rates
• Reduce or eliminate interest-free grace periods
• Tighten their credit standards
• Lower credit limits

Actions you can take
Most of the provisions of the CARD legislation were in place by Feb. 22, 2010, while credit card companies must implement the entire set of changes by July 2010.  Now may be a good time to review the cards you currently hold and evaluate your options.  Consider cashing in any credit-card rewards and perks you have been accumulating — particularly if those benefits will be reduced or eliminated.

Also, watch for letters from your credit card companies — and do not just throw them away like you may have in the past.  These may be notifications of rate increases or other changes to the terms and conditions of your card.

If you find out that your benefits are diminishing and your fees and rates are going up, consider other credit options.  First, compare your card’s annual fee (if any), ongoing annual percentage rate, rewards and additional benefits to those of other credit cards.  Then select the more competitive card option.  Keep in mind that some issuers have already been following the more responsible practices set by the CARD legislation, which means they may offer rates and terms you can rely on.

Your financial advisor can help you prepare for these changes and discuss how responsibly managed credit card debt can fit into your financial picture.