This is a guest post from Adam Jusko, founder of IndexCreditCards.com, an information and comparison site for credit cards that maintains a list of over 1200 cards. You can follow Adam on Twitter for quick credit tips and opinions. I've mentioned Index Credit Cards many times before, most notably in my post from 2006 called “The Only Credit Card Guide You'll Ever Need”.
Last May President Obama signed into law a sweeping set of rules and regulations concerning the business practices of credit card issuers. Known as the Credit Card Act, the new laws promised a level playing field where consumers would be treated more fairly and credit card terms would be easier to understand.
But, much like your favorite credit card agreement, the law had something nasty buried in the fine print — no part of the law would take effect immediately. Instead, certain pieces of the law didn't take effect until August, and many others have an effective date of February 2010. Credit card issuers used the window between the law's signing and its actual enforcement to raise rates, slash credit limits, or even completely take your card away.
Card issuers claim the new rules restrict their ability to price cards based on risk, and will lead to higher prices for everyone. Politicians might call the card issuers' reactions to the new law “unintended consequences,” and tell you that leveling the playing field unfortunately means that some people get leveled on the way toward a fairer marketplace. (Actually, no politician would ever say that.)
What's the truth? What exactly do these new laws do? And, what can you expect in the coming years when you use your credit cards or attempt to get new ones?
Let's start with what the law actually says. It's long, so I'll bullet point it as much as possible. (Go here if you want to read it in all its glory.)
Here's what went into effect in August of 2009:
- Credit card issuers must give you 45 days notice if they intend to raise your rates. Further, they must allow you to “opt out” of the rate increase and pay your existing balance under the old rate terms.
- Credit card issuers must send bills at least 21 days before the due date.
What it means: Credit card issuers can no longer jack up your rates with little warning, and you now have the option to decline the rate increase. However, declining an increase means you can no longer use the card and it gives the issuer the freedom to increase your minimum payment to either twice its previous level or to a level that guarantees the card will be paid off within five years. So, if you decline, be sure you have a better card option going forward.
Next up are the regulations due to kick in next month. I'll take them in chunks, based on rules that naturally go together:
- Credit card rates can't be increased on outstanding balances — except for the increase that happens when a 0% or other low interest introductory rate expires on newly-issued cards or when a customer is 60 days late on a payment.
- If a customer is 60 days late on a payment and an interest rate is increased, the issuer must dial the rate back to the original level if the customer pays the past-due payments and makes 6 straight months of on-time minimum payments.
- Card rates can not be increased in the first year of a card agreement (unless there is a limited-time low-interest introductory rate as part of the original card offer).
- Low-interest introductory rate offers must last at least 6 months.
- Customer payments must be applied to higher-interest balances first.
- If a card is marketed as “fixed rate,” the card issuer must reveal exactly how long the rate is guaranteed to remain the same.
- Credit card issuers can not use “double-cycle billing,” a practice that allowed issuers to charge interest based on the average balance from the past two months, even if last month's balance was paid.
What it means: Out of all the new rules, the ones above are probably the greatest victory for consumers, and probably the most harmful to card issuers' profits. In general, they say that any purchase you make must be charged interest only at the card's interest rate when the purchase was made. Even if the issuer hikes your rate, the higher rate only would apply to new purchases going forward. Credit card issuers are really screaming about this — they believe it stops them from penalizing bad customers who turn into bigger credit risks, and they threaten that it will stop them from accepting many consumers altogether.
From my perspective, it's simple fairness — even if a person becomes a bigger credit risk, I see no reason issuers should be able to “bait and switch” by increasing the rates on previous purchases made under different terms. This practice has forced many credit card customers to get into desperate financial straits. What card issuers may be missing in their anger is the possibility that fewer cardholders will default on their cards under these regulations, because they won't suddenly be saddled with payments that are double those required previously.
Here's the next set of rules:
- Payment due dates must be the same each month. If a due date falls on a weekend or holiday, the due date must change to the following business day.
- Issuers can't charge fees for payments by certain methods. For example, issuers can not charge customers more if they pay by phone than if they pay online.
- Issuers can't allow customers to go over their credit limits and then charge “over the limit fees” unless the customer has first “opted in” — specifically asking for the service.
- Issuers must include a place on the bill that shows customers how long it would take to pay off their balances if only the minimum required payment was paid each month. (Other similar disclosure rules are still being developed.)
What it means: Most of these fall under the “sneaky tricks” portion of the rules, in order to stop issuers from charging you fees for things that seem quite reasonable. For example, you shouldn't be charged a late fee if your payment can't be delivered on a due date that happens to be a Sunday, and card issuers shouldn't be giving you a credit limit and then allowing you to go over that limit as a “service” that charges you an extra fee.
The last two rules are targeted at specific cardholder groups:
- Issuers may not charge upfront fees that are greater than 25% of a card's credit limit.
- Issuers may not issue cards to people under 21, unless the customer has proof of income or has a co-signer who accepts responsibility for the card.
What it means: The first point is targeted at “subprime” cards for those with poor credit. A common industry practice when targeting bad credit customers has been to offer a low credit limit and then charge upfront fees that eat up most of the limit. For example, you sign up for a card with a $500 limit, but there are $450 in fees in order to get the card, so you start off with a $450 balance and only $50 in actual spending power. Desperate customers have been willing to take this deal, but no more.
The second point may kill the college student credit card market. Card issuers have long targeted college students, trying to “get them early” in hopes of creating brand loyalty. Lawmakers felt too many students were getting cards they couldn't pay for, leaving college with thousands of dollars in debt.
What the future holds
While the Credit Card Act has thankfully rid us of many unfair practices going forward, the card issuers' frenzied attempt to either hike rates or kick out unprofitable customers has left many between a rock and a hard place. In the past, a customer who was treated poorly by one credit card company could simply turn to another, with the likelihood being they'd be welcomed with open arms. Today, and at least for the next year or so, I believe consumers will have difficulty obtaining new credit cards, especially consumers with average credit or worse. This is bad news for those stuck in a high-rate situation.
What comes later is likely to be a good-news/bad-news situation. Credit will become more accessible again, but in the future it will more likely come with an annual fee, or with fewer if any rewards on purchases, or with new fees that have yet to be devised. The credit card industry has proven to very adaptable, and while it's a sure thing that they'll play nice legally, that doesn't mean future credit card agreements will be written with your best interests at heart.
J.D.'s note: Don't forget that you can opt out of this madness by simply refusing to use credit cards in the first place. I have one personal card, but there are times I'm tempted to go back to my “no credit needed” ways.