|The New Credit Card Rules
(The Card Act of 2009) and
How they affect you
The Personal Financial Management Page
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|The Credit Card Accountability,
Responsibility and Disclosure Act
The Card Act of 2009
The new Card Act of 2009 has been hailed by many as a great victory for consumers. It is true that the use of some of the most predatory fees by credit card issuers, such as late fees and over the limit fees are now more restricted. Others, such as inactivity fees have disappeared altogether.
There are also some restrictions to interest rate changes, but the central problem of limiting the large spread between the costs of money, as measured in the discount rate, LIBOR, or whatever other rate the card issuer uses, and the rates charged by credit card issuers to their customers, has been left untouched.
In fact, overall average annual interest rates have increased steadily, according to IndexCreditCards.com and are now (October 2010) at 16.79% (average Consumer Credit Card). It is over 1.5 percentage points higher than a year ago. An increasing number of cards have switched from fixed to variable rates.
The default rate is still high and with the continued problems in the employment market will remain at a high level. It is likely, that credit card issuers make up some of the revenue losses caused by defaults and more limited fees with the higher interest rate.
The Changes of the Act and how they affect you
One of the aims of the Card Act of 2009 is to prevent unfair increases in the interest rates and changes in the Term of the Credit Card Agreement. The following table shows you a summary list of the changes that directly affect the credit card holder.
Disclosure and Fee Charging Issues by Credit Card Issuers
Issues related to Special Cards
and Young Card Holders
|Protection of Young People using Credit Cards||Applications for a credit card from young consumers under the age of 21 have to contain: The signature of a parent, guardian or another person who will take responsibility for the payment of the debt. Alternatively, proof that the applicant has independent means of repaying the debt is also accepted!|
|Increases in the credit limit on the above accounts have to be approved by the guarantor (parent, co-signer, guardian etc.)|
|Prescreened offers for young applicants (18 to 21) are only allowed to a limited extent|
|Affinity arrangement between credit card issuers and universities have to be transparent and explicitly visible. Aggressive marketing of such cards is more restricted (but not forbidden!).|
|Prepaid Gift Cards||All gift cards are to have a life span of at least five years. The practice of a "declining value" (if you do not use the card within a specified time) and hidden fees for those cards not used within a reasonable time is prohibited. (There is no definition of what a "reasonable time" is.)|
|Measures designed to strengthen the Federal Governments oversight over Credit Card and related Companies||Each Credit Card Issuer is now required to post its credit card agreements on the Internet and to provide those agreements to the Federal Reserve Board for posting on its own web site.|
|The Federal Reserve Board is also required to review the consumer credit market, including the terms of credit card agreements and the practice of credit card issuers. This includes the costs and availability of credit to consumers.|
|The Federal Trade Commission is now required to watch the rules of companies to prevent deceptive marketing of "free" credit reports.|
|The existing penalties for companies that violate the Truth in Lending Act for Credit Card Customers are increased.|
|Transparency in Credit Card Pricing||The GAO is required to study the impact of interchange fees on consumers and merchants, specifically their disclosure, pricing, fee and cost structure.|
|Small Business Protection||The Federal Reserve is to study the use of credit cards by small businesses and make recommendations for administrative and legislative proposals.|
|A Small Business Information Security Task Force is to be established to address the information technology security needs of small business and help prevent the loss of credit card data.|
|Financial Literacy Promotion||A comprehensive summary of existing financial literacy programs and the development of a strategic plan to improve financial literacy education is required. (It is not stated who will be responsible for that!)|
Source: Senate Committee on Banking - Credit Card Summary - Final Passage May 19 2009
The Act, while making some important and long overdue changes in consumer protection, contains an extraordinary jumble of ideas. For instance, young people should have some protection against predatory credit card marketing, especially if they come from affiliates of their own universities. However, if you are 18, you are either an adult and understand what your duties and responsibilities are, and can handle them and their consequences, or you do not belong into a university, or another higher education establishment in the first place!
There is no doubt credit card issuers will make up some of the loss in revenue from predatory fees through measures like annual membership fees. Some of those, ranging from $50 to $500 have already been increased. Interest rates are also slowly creeping up. Other areas of higher costs will be fees related to cash advances.
Finding a credit card will also become more difficult. Especially if you are "challenged" with your FICO credit score and deemed to be a bad risk for credit card issuers. You should look at web sites such as creditcards.com or cardratings.com, if you search for the right credit card for you.
The likely Impact these changes will have on an individual Credit Card Holder
|If your Credit Card Issuer charges an annual Membership fee, it is likely to increase. You could also suddenly be asked to pay an annual membership fee, if the card was free up to this time.|
|Interest rates will be increased to make up for lost revenue from fees|
|If you do not use your card over an extended period of time (say six months), it is likely to be cancelled.|
|It will be more difficult to obtain a credit card. Especially if you have a low FICO Score.|
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