What are the new rules and how can they affect you?
Here are some of the new credit card rules which will come into effect on July 2010 to find out how they will affect you.
Disclosure of rates and fees: Under the new rules, credit card contracts should include a summary of the rates and fees involved. Credit card companies need to tell consumers how long they?ll take to clear their debt if they pay only the minimum on their cards every month. For instance, if you have a credit card balance of $1200 at 18% interest rate, you may not realize that paying only the minimum will take you more than 10 years to get out of debt. But under the new rules, consumers will be aware of the consequences of minimum payment and hence they may try making extra payments in order to pay back their dues faster.
Allocation of payments: Currently, if you pay more than the minimum, credit card companies allocate the extra cash towards the balance with the lowest interest rate. But as per new rules, any payment in excess of the minimum amount will be allocated in a way that?s beneficial to you (credit card holder). This implies that the extra payment can be allocated towards the highest interest account or it can be distributed evenly between various accounts. So, if you?re paying varying amounts of balance at different rates, then you can clear your dues faster thereby paying less in interest charges.
Age limit of applicant: Currently, any credit card applicant can get the card without a cosigner if he is above 18 years of age. Under the new credit card law, anyone below 21 years of age needs a cosigner. So, if you?re a college student, you?ll probably have a hard time getting a card. However, if you?re under 21 years and can prove that you have a job, then you won?t need a cosigner.
Interest on new purchase: Most credit card issuers instantly charge interest on new purchases if you?re carrying a balance from the previous month. But the new rule is likely to change this. As per new rules, consumers will surely pay interest on balance carried over from previous month. But no interest will be charged on new purchases until and unless the grace period of 21 days (currently 14-15 days) is over. Moreover, you?ll get your statement 21 days ahead of the due date. So, you can arrange for the payments beforehand and avoid a default if you?re in financial problem.
Notice of change in rates/terms: Right now, credit card companies can change the rates and terms of agreement any time without any notice. But the new law requires that companies should provide 45 days notice before they initiate such changes. This time period may be enough for you to follow a new plan and pay off the card prior to such changes being effective. If you?re offered reward points, 45 days may be enough for you to cash in the points and utilize them to your benefit. Moreover, if you have a low introductory rate on your card, it is likely that you?ll receive a notice before the rate is hiked. Thus, you can get prepared for managing higher payments.
Change in credit limit: As per new credit card rules, issuers cannot raise your credit limit without your consent. They need to call you or send a notice along with your monthly statement, take your approval and then increase your credit limit. This will give you the chance to decide whether you?ll opt for higher credit limit. Otherwise, higher credit limit may induce you to take out more cash and hence payments may become unaffordable. However, if you intend to get a higher limit, you?re free to ask for it.
No more double-billing cycle: The new rules put an end to the double-billing cycle. In this method, if you pay the entire balance one month, but avoid doing so the next month, then interest for the second month will be calculated on the balance in the previous billing cycle as well as the current cycle.
Rate hike due to late payment: Currently, credit card issuers hike interest rates even if you?re late on a different account. Being late on one account may trigger a rate hike on all other accounts. But under the new rules, unless you?re 60 days late, the new interest rate can be applied only to new balances. The old balance will be charged at the previous interest rate. This is quite helpful for those who?re working hard to pay down their credit card debt. They needn?t pay more on their old balances as long as they?re current on their accounts.
Charging over-limit fees: Credit card issuers make a lot of money by charging you extra interest on your balance when it exceeds your credit limit. But under the new credit card rules, issuers will have to ask you before they impose over-limit fees. If you do not agree, there?ll be no over-limit fees charged on your account. Moreover, if your balance exceeds credit limit due to a hold (on your account) placed by merchants, you won?t be charged extra fees.
Subprime credit card fee cap: Debtors having bad credit usually go for subprime credit cards (with credit limit of around $500) which require a large upfront fee. The new rules will however, limit the fees to 50% of the available credit limit. Card holders will also be allowed to pay off the initial balance over a year and not immediately.
What are the pros and cons of the new rules?
The Credit Card Act, 2009 aims to stop consumers from falling into debt problems by imposing restrictions on late charges and over-limit fees, and getting rid of the double-billing cycle. In addition, notifying consumers of how long they?ll take to get out of debt, will help them avoid paying a lot of interest over the years and induce them to make extra payments in order to pay off debt faster.
However, there?s a questionable provision in the Credit Card Act. For instance, when a borrower is allowed to pay off balance at the same rate unless he?s delinquent for 60 days, it gives him the impression that there?ll be no penalty if he misses a payment or two. But, if he skips a payment, there?s a chance of default and then it does make sense to raise interest rates on his account in order to offset the risk.
The new rules will however, make it tough for people with bad credit to get a subprime credit card (available at high interest rates) as credit card issuers may bring about changes in availability of credit. Since card issuers will have to limit penalties on riskier borrowers, they?d like to make up for their loss in income by going after those with good credit.
How will credit card issuers adjust to the new rules?
Credit card issuers are likely to revive annual fees, cut down cash-back offers and other reward programs. Some of the issuers have already raised fees for services such as balance transfer and cash advance in order to compensate for any loss they may incur when the new rules become effective.
Major banks such as American Express, Citigroup and Bank of America have already raised interest rates on credit cards they issue. The new rules do not cap interest rates; hence banks can lift up rates (including the APRs) though at a slower pace and with proper disclosures. Thus, the new credit card rules are likely to force banks to issue fewer cards at higher costs, that is, by charging high interest rate. However, this may encourage people to save more and use plain cash instead of cards for new purchases.
Another possible change may be the reduction in the value of reward points. Credit card issuers may cut down the value of the reward points. For instance, you may find your 6% gas rewards being trimmed down to 3% or so. Moreover, issuers may stop offering long term introductory rates.
It is expected that the new credit card rules will cost issuers $12 billion a year in lost fees and income. They?ll affect the direct marketing programs of card issuers thereby bringing down their direct mail volume. While credit card issuers will cut down on credit limits in order to compensate for their loss in income, consumers will have more money to invest in the economy rather than pay off their bills. The best thing about the new rules is that, it aims to protect consumers from late fees and sky-high interest charges by making lending practices more transparent to credit card holders.
For more information on how you can reduce your credit card debt, check us out.
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