9 benefits from the Credit CARD Act
Credit cards have treated their customers pretty badly in recent years.
There was little any of us could do as they raised interest rates, slapped on fees, cut credit limits and imposed onerous new terms.
But the Credit Card Accountability, Responsibility and Disclosure Act was designed to put an end to the most abusive practices.
Here are 9 benefits we're enjoying with all of the new regulations now in effect:
Benefit 1. No more universal default.
This was the single biggest penalty cardholders could face: a big increase in their interest rate because they were late with a payment to another creditor.
Let's say you didn't get your electric bill in on time. The power company tattles to the credit agencies and your credit card company spots the snafu during a routine check of credit reports.
It decides you're a deadbeat in the making and imposes a high-risk default rate of 28% on your account -- twice the 14% you had been paying -- usually without notifying you in any way.
A few months go by, and you start wondering why the finance charge on your credit card suddenly shot up. You take a closer look at your bill and are shocked to see the interest rate.
You call the customer service number, and weeks if not months of negotiations ensue as you try to get the rate reduced.
Those days are over.
The Credit CARD Act says your interest rate can't be raised based on your record of paying other bills.
Benefit 2. Retroactive interest rate increases are banned.
Credit cards will no longer be able to raise the interest rate on existing balances.
Changing the terms and increasing the rate on money you've already borrowed isn't too fair.
Banks will only be able to raise rates on existing balances when:
- An introductory or promotional rate expires.
- You fall more than 60 days behind on your payments.
- You have a variable-rate card and the prime rate, which most variable-rate credit cards are tied to, goes up.
Rates can still be raised for future purchases.
Benefit 3. No more double-cycle billing.
Double-cycle billing, also called two-cycle billing, is when the card issuer calculates your interest by computing a daily average balance over the last two billing cycles. This is bad for you because you could end up paying interest on balances that you already paid off.
This type of billing virtually wipes out the grace period for people who paid off the balance in the previous month. It benefits the card issuer and always results in a higher interest charge than with the traditional daily average balance method.
Benefit 4. Payments must be used to reduce the most costly part of your debt.
Credit cards usually charge different interest rates for purchases, balance transfers and cash advances.
They've sought to maximize their income and keep cardholders in debt for as long as possible by applying all payments to that portion of the balance being charged the lowest interest rate.
The new law requires any payment in excess of the minimum payment to be applied to that portion of the balance being charged the highest interest rate.
Let's say you were paying off $3,000 worth of purchases at 9% interest and $1,000 worth of cash advances at 22% interest.
Under the old system, you wouldn't be able to repay a cent of the costly cash advances until you'd paid for all of the purchases.
Now, every dollar you submit over the minimum payment will go toward retiring the cash advances.
Benefit 5. No more pillaging college students.
College students have been the target of expensive marketing campaigns that lavished them with credit and pulled them into debt before they even graduated.
Now, anyone under the age of 21 will be required to have a cosigner -- like mom or dad -- before they can get a credit card.
That might not sound like such a great idea if you're 19 years old. But many thirty-somethings who are still paying off credit card debt from their college days wish their parents had been able to monitor their spending.
Benefit 6. New limits on late fees.
If you're late with a payment, you can't be charged more than $25 or more than your minimum payment, if that's less than $25.
One exception: If you were late with one of your six previous payments, you can be charged up to $35.
Benefit 7. Cards must tell you the real cost of your debt.
The new law requires monthly statements to disclose how long it will take to repay the balance if you only make the minimum payment and how much that will cost in interest.
For example, if you have a $1,000 balance at 12%, it typically takes 62 months and costs $267 in interest to pay it off.
Once you see that, you might be motivated to make bigger payments.
Benefit 8. Agreements you can see and understand.
Credit cards often refused to disclose their full terms and conditions until you'd applied and been accepted. When the contract finally arrived, the most costly fees and penalties were usually hidden in 20 pages of fine print loaded with legal terms.
You needed a magnifying glass and a lawyer to understand it all.
But the law's "Plain Language in Plain Sight" rule requires all terms to be disclosed before an account is opened, in easy-to-understand language that clearly states all fees and rules.
The law also requires issuers to make all credit card contracts available online through this government Web site.
Benefit 9. It will be easier to avoid over-the-limit fees.
Cardholders are usually allowed to exceed their credit limits by a few hundred dollars so that they can be hit with an over-the-limit fee.
The act no longer allows banks to charge over-the-limit fees unless customers voluntarily opt in to some kind of over-the-limit protection plan. Those who do can only be charged one fee per billing cycle, not one fee for each transaction.
Some banks and credit card companies have already announced that they're simply doing away with over-the-limit fees.
In addition to all the good things listed here, the act also requires that:
- Cards must give 45 days' notice before changing rates or fees, up from 15 days.
- Monthly bills must be mailed out at least 21 days before the due date, up from 14 days.
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