New Credit Card Rules

Consumers are now familiar with the Credit Card Accountability Responsibility and Disclosure Act of 2009 or CARD and how it protects borrowers against unfair interest rate hikes and other exorbitant credit card fees. However, most consumers are not aware that the Federal Reserve enacted new rules for credit card companies on February 22, 2010 to ensure that consumer rights outlined in the CARD Act of 2009 are truly protected. As the regulatory agency of America’s banks, the Federal Reserve has to police the banks to make sure that they don’t try to exploit potential loopholes in legislation and thereby exploit consumers.

The February 2010 regulations enacted by the Federal Reserve provide the following protections to credit card consumers:

Credit card companies must tell you how long it will take to pay off your balance. Now your monthly credit card bill must include a breakdown of how long it will take to pay off your balance if you only make the minimum payments as well as what you would need to pay each month in order to pay off your balance in three years.

No interest rate increases for the first year. Credit card companies can no longer increase your rate for the first 12 months after you open an account, EXCEPT IF:

• Your card has a variable interest rate tied to an index.
• There is an introductory rate, but it must be in place for at least 6 months.
• You are over 60 days late in paying your bill.
• You violate a payment arrangement agreement.

You MUST be notified when they plan to increase your rate or other fees. Your credit card company is now required to give you 45 days written notice before they can

• Increase your interest rate;
• Change fees that apply to your account
• Make any significant changes to the credit contract terms.

If you do not agree to the new terms you now have 45 days to cancel your card before the changes are put into effect. However, if you do choose to cancel your card your credit card company may close your account and increase your monthly payment, with certain limitations.

Your credit card company DOES NOT have to give you 45-day written notice if:

• You have a variable interest rate tied to an index and the index goes up.
• Your introductory rate expires.
• You violate a payment arrangement agreement and you experience a rate increase as a consequence.

Increased interest rates can only be applied to new charges. If after 12 months your interest rate is increased it cannot be applied to a balance accrued before the rate increase itself.

Restrictions on over-the-limit transactions. You must now opt-in to allow transactions above your credit limit to be processed; otherwise the charges must be denied. If you do not opt-in and your credit card company allows your card to be charged above your credit limit, you cannot be charged an over-the-limit fee. Also, if you do go over your limit you can only be charged one over-the-limit fee per billing cycle, and you can opt-out at any time.

Payments must be directed to highest interest balances first. If you make more than the minimum payment, the difference must be applied to the balance with the highest interest rate, with one exception:

When you owe a balance on a deferred interest plan, the credit card company may give you the option to apply payment in excess of the minimum balance to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, your entire payment must be applied to the deferred interest-rate balance first.

No double-cycle billing. Interest charges can only be applied on balances in the current billing cycle.

Standard payment dates and times. Your credit card bill must be mailed or delivered at least 21 days before your payment is due. Furthermore,

• Your due date must be the same date each month
• Payments must be accepted until 5 p.m. on the due date.
• If your payment due date falls on a weekend or holiday you will have until the following business day to pay.

New caps on high-fee cards. If a card comes with fees such as an annual fee or application fee, those fees cannot total more than 25% of the credit limit. The 25% cap does not, however, apply to penalty fees.

Protections for underage consumers. Applicants under the age of 21 must prove that they have the income to pay their balances or they must have a cosigner in order to open a credit card account. Also, if an underage cardholder wishes to increase their credit limit and they have a cosigner, the cosigner must agree in writing to the limit increase.

The Fed also announced in October 2010 that it would amend Regulation Z, the regulations implementing the statutes of the Truth In Lending Act, in order to stop certain predatory practices enacted by credit card companies in attempts to maneuver around the CARD Act rules and earlier Federal Reserve regulations. The amendments will clarify matters of compliance for card issuers on the following:

Promotional programs that waive interest charges for a specified period of time. Reduced interest rate promotions are subject to the same protections as promotions that employ a reduced interest rate for a specified period. Credit card companies have recently used a ‘bait and switch’ approach to certain reduced rate offers, not disclosing that the promotion rules would allow them to revoke the benefit at any time.

Fees charged before a credit card account is opened. Application fees and other fees that are paid before a credit card account is opened are covered by the same limitations as fees charged during the 12 months after the account is opened to further avoid predatory lending practices.

Proof of ability to pay must be proven for the cardholder as an individual, not household income. Predatory lenders often issue cards to individuals who do not truly have the ability to maintain their accounts based on household income or other income credits, locking these consumers into a debt trap.

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Prime Rate & Credit Cards: Another Timebomb?

In 2007, the Pew Charitable Trust launched the Safe Credit Card Project; an ongoing study which analyzes industry practices and how they affect consumers. On October 28th, the project released their monthly report which discusses an alarming trend among bank-issued cards: circumventing the Credit Card Reform Act of 2009 by shifting to variable-rate APRs which are tied to the Prime Rate. This practice allows issuers to raise interest rates under circumstances which would normally not be permitted.

Data on Variable Rate Cards
According to the study – which encompasses over 400 credit cards – as of December 2008, 31% of bank-issued credit cards had fixed rates. The current report states that number is now less than 1%.

For now, this trend does not apply to cards issued by credit unions; as of July, 64% of their cards continue to offer fixed interest rates on purchases.

Minimum Rate Requirements
Furthermore, a growing number of creditors are implementing Minimum Rate Requirements (MRR). This practice sets a minimum benchmark APR; preventing the variable rate portion from falling below a predetermined level, even if the index it is tied to (such as the Prime Rate) moves lower.

Future Implications
Considering that the U.S. Prime Rate is at a historically low level of only 3.25%, interest rates on almost all bank-issued credit cards are poised to increase in the future. During rampant inflation in the seventies and eighties, the Federal Funds Rate reached double-digits; peaking as high as 21.50% on December 19th, 1980. Although that event was an anomaly, the historical median prime rate is 8.75% and the cumulative average is 9.842%... both of which are significantly higher than today.

Similar to the adjustable-rate mortgage collusion which has recently unraveled, consumers are now leveraging credit cards to pay for tuition, medical bills, and other expenses with the assumption their APR will remain relatively consistent as they pay down the balance. Although the economic consequences of this problem dwarfs in comparison to the mortgage debacle, it is a potential time bomb nonetheless. In turn, some of today’s credit card reviews and marketing campaigns are not only misleading the public, but also perpetuating the problem.

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