Last Friday Barack Obama signed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 (aka “Credit Card Bill of Rights Act”) into law. The law does not go into effect until February of 2010, but there has been lots of talk about this bill already. Let’s talk about what is really in this bill and what this bill really means for you and your wallet.
Interest Rate Increase Limitations. Companies cannot increase your interest rates on existing balances unless you are 60 days past due. You must also receive 45 days notice of the rate increase.
Interest Rate Reduction for On Time Payments. In addition, if your rates have been raised, making on time payments for six months would force the company to return your rate to the previous rate.
Payment Postings. Any payment amount above the minimum balance due must be applied to the account balance with the highest interest rate. Companies will also not be allowed to charge late fees if they delayed posting a payment to intentionally generate additional fees.
Statement Notifications. Credit card companies must send your statement 21 days before your bill is due.
No Cards For Those Under 21. Companies cannot offer credit cards to individuals under 21 years of age unless they have verified their income or their parents are co-signing.
What it Really Means for You
Credit Card companies are not mean spirited and as much as some people think, they are not out to get you. They are simply profit driven companies (as all non non-profit companies are) that report to their shareholders. This bill was intended to protect the consumer when it comes to credit cards. There are some good things in this bill that do protect consumers but there are also some unforeseen consequences.
Drastic Rate Increases for Everyone by February 2010. Once this bill goes into effect, the additional restrictions on credit card companies will reduce the ability of the companies to make profits. The shareholders will not take the hit, so that profit must be “made up” somewhere, which means the credit card consumers will pay for it in another way. Since this law does not go into effect until February 2010, look for rate increases across the board for everyone in preparation for the new regulations.
The Return of Annual Fees? Another way credit card companies could recoup their profits is enacting annual fees once again. Today very few cards have annual fees, but don’t be surprised if annual fees are on the rise in the next few years.
College Students will have a harder time finding money for school. Yes, college students do rack up large amounts of debt on plastic while in school, but school is expensive. After Stafford student loans are used, many credit cards offer lower interest rates than a private student loans making credit cards a viable option for many students to finance education especially when they come with even lower introductory offers. Most private student loans start at about 12% APR or higher, while some credit worthy students can easily obtain credit cards at lower rates.
The biggest benefits for consumers. Consumers will benefit the most from having their payments posted to the balance of the highest interest rate. Previously it was standard for credit card companies to apply your payments to the balance of the lowest interest rate, making it take longer for the consumer to pay off credit card debt. This will help consumers pay off their credit card debt faster. The minimum notification periods for receiving statements is also a good thing for consumers to protect them from some of the shady practices used by some credit card issuers.
I’m sorry, your card has been declined. Credit card companies have used high interest rates to reduce their risk for lending to higher risk individuals with lower credit scores in the past. If they are not allowed to raise interest rates when your credit score drops, they the only recourse they have is to drastically lower your credit limits and/or cancel your accounts if you are a high risk borrower.
Fewer credit card rewards. Unfortunately we will probably see a reduction in the amount of reward programs being offered in an effort by companies to save money.
Who Does it Hurt the Most?
This legislation hurts those with credit scores 680 and lower and individuals under 21 the most. For those with credit scores 680 and below, they may see the worst of the rate increases between now and February 2010. They may also experience the worst of the account closures, credit limit reductions, and denial of credit because of the risk they now represent to credit card issuers.
Creating a special set of regulations on individuals under 21 is an outright assault on their rights to enter into a private contract (yes, a credit card is a private contract between you and a credit card issuer). Regulating private contracts is not going to ensure that lenders do not lend to unworthy borrowers, and that borrows will not borrow more than they can repay.
You cannot legislate personal responsibility. Delaying an individual a credit card at age 18 and making them wait until they are 21 years old will not make them responsible. If supplying income information and/or requiring a co-signatures is such a great idea, why not implement it for all age groups? Oh yes, credit card companies already ask for that information when you apply for a card. They just don’t verify your employer or income, but it is still fraud to misrepresent any information on the application.
There are a few things in this law that will protect the consumer, but overall this legislation has the potential to seriously hurt consumers and their ability to obtain credit.
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May 25, 2:04 am
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