Q: I’ve gotten myself into a bit of trouble with my credit cards over the past year. Now I owe a lot of money on multiple cards, and I’m worried about what might happen to my interest rates and other fees on these cards.
A: A new law that places significant restrictions on credit-card companies’ ability to increase interest rates and charge a variety of fees was passed swiftly by Congress earlier this year. Consumers will begin seeing new protections take hold this fall. Following is a brief rundown of the bill’s key provisions and what they might mean for the millions of Americans who carry balances on their credit cards from month to month.
HIGHLIGHTS OF THE CREDIT CARD ACCOUNTABILITY, RESPONSIBILITY AND DISCLOSURE ACT OF 2009:
Limits on interest-rate increases. Interest-rate increases on existing credit-card balances will be allowed only under certain conditions — i.e., the cardholder has fallen 60 days behind in minimum payments, a promotional rate expires or the card carries a variable rate. Interest rates on new cards cannot be raised for the first year and cardholders must be given 45-days’ notice of any significant change in contract terms, including a rate increase.
Elimination of “universal default” and “double billing” practices. Universal default, the practice of raising interest rates on cardholders based on payment records with other creditors, and “double billing,” the practice of computing finance charges based in part on balances from previous billing cycles, will no longer be allowed.
More time to pay bills. Card issuers must mail statements at least 21 days before they are due.
Highest-interest balances paid first. When cardholders have accounts with varying interest rates — for purchases versus balance transfers, for instance — any payment above the minimum amount due must be applied first to the balance with the highest interest rate. Current industry practice is to do the opposite, thus extending the debt pay-off time.
Limits on over-limit fees. Cardholders must give their prior permission to process transactions that would place their account over the limit.
Plain-language disclosures. Card companies must spell out clearly how long it will take cardholders to pay off an existing balance — and the total interest cost — if the consumer paid only the minimum due.
While the law’s focus on controlling interest rates and fees should benefit millions of credit-card users, opponents of the bill have argued that the law will make credit cards less available and more costly. Credit-card issuers have warned that by imposing restrictions on their ability to raise interest rates as a means of managing risk, they will be forced to make it more difficult for some consumers to obtain credit cards at all — and more costly for those who do.
Much can change in the intervening months before the new law takes full effect. However, credit cardholders can take steps now to ensure their access to affordable credit is preserved.
Research a better deal. For individuals unhappy with the terms of their current credit-card contract, now may be an opportune time to shop around. Cardholders can start by negotiating with their current card issuer and/or by researching other offers. Users can track which cards are in compliance with the new rules at www.billshrink.com/credit-cards/bill-of-rights.
Know your credit score. The higher your credit score, the more negotiating power you will have with creditors. Before launching a campaign to find a better card, obtain a copy of your credit report and credit score at www.annualcreditreport.com. Credit reports are free, while credit scores can be purchased for a nominal fee (less than $10).
This article was prepared with the assistance of Standard & Poor’s and is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor or Jeremy Gussick if you have any questions. LPL Financial, Member FINRA/SIPC. *Based on total revenues, as reported in Financial Planning Magazine, June 1996-09.