With economic conditions taking a hit over the past several months, consumers found solace in credit cards, filling a financial void created by salary cuts, layoffs, skyrocketing bills, and unemployment. Credit card companies notably, upped the ante hiking interest rates along with other unfair practices that forced Capitol Hill to clamp down on the issuers.
In signing landmark legislation designed to protect consumers from abusive credit card practices late last month, President Barack Obama said, “with this bill, we’re putting in place some common-sense reforms designed to protect consumers.â€
This Credit Card Accountability Responsibility and Disclosure Act (CARD) legislation is “leading us away from credit card companies turning penalty fees and deceptive practices into a business model which is sort of what happened over the last 10 or 15 years,†said Austan Goolsbee, a senior White House economic advisor. Card issuers generated $15 billion in penalty fee income last year alone, he said. Most provisions of the new credit card bill will go into effect on Feb. 10, 2010. (Black Enterprise Credit Card Checklist)
About 91.1 million American household, or 78%, had at least one credit card at the end of 2008 and Americans’ credit card debt reached $972 billion during the same year. In the last 12 months, 15% of Americans, or nearly 34 million people, have been late making a credit card payment and 18 million people have missed a payment entirely.
Despite these troubling numbers, some caution the new law could backfire making credit cards more expensive or harder to obtain.
“[Major credit card companies] will probably start to charge annual fees which will allow them to recoup some of that revenue,†says Barron H. Harvey, dean at the Howard University School of Business. Companies are going to look for other means to derive revenue that are not covered in the new law, which mean card holders will need to be more vigilant in monitoring their issuer, Harvey explains. “If there’s a part of your bill or contract you don’t understand, you’re going to have to call and ask,†Harvey says.
See key components of the reform here.
BlackEnterprise.com spoke with Goolsbee for more on how the credit card reform will affect consumers.
BlackEnterprise.com:Â What are some of the most important elements of this bill that can be immediately useful to consumers?
Austan Goolsbee: If
[a card issuer] offers you a low introductory rate [for a new card], that rate has to remain for six months and they have to make totally clear what is going to happen to your interest rate over the course of the first year.Additionally, credit card companies are not allowed to raise interest rates for balances you already incurred. Â Say something happens and you exceed your limit and they raise your rate. They apply that higher rate to balances you already had, [meaning] you already took out a loan but they just raise rate retroactively, that’s banned. Credit card companies have to give you at least 21 days to pay your bill, they can’t send you a bill three days before the due date.
[The bill] eliminates a series of relatively hard to explain practices that take advantage of customers like double billing cycle. If you have a balance that’s made up of low interest rate debt and high interest debt and you make a payment for part of it, [traditionally], credit card companies automatically pay down the lowest interest rate debt leaving you with the high interest rate debt. [Under the new law,] even if you make a partial payment they have to use it for your high interest rate debt first.
If a consumer thinks he or she has been a victim of predatory practices by credit card companies what is the best way to address the issue?
The bill is setting up a variety of accountability measures. There may be a toll free number consumers can call. If you’re having problems, you can contact the Federal Trade Commission, who is in the business of trying to prevent consumer fraud.
One problem we faced in the past is even when we passed certain rules, or laws, or regulations, if [companies] simply didn’t comply it was relatively hard to catch them and penalties were relatively modest. Means of enforcement now include higher penalties and regular reporting to supervisory agencies. It’s going to be partly tied in with the regulatory reform plan the government is coming out with in regards to consumer protection.
Key Components:
–Prevents credit card issuers from increasing interest rates on cardholders in good standing for reasons unrelated to
the cardholder’s behavior with respect to that card–Requires payments to be applied first to the credit card balance with the highest rate of interest, and to minimize finance charges
–Requires credit card statements to be mailed 21 days before the bill is due rather than the current 14
–Requires cardholders to be given 45 days’ notice of any interest rate increase
–Prohibits issuers from charging a fee to allow a credit card holder to pay a credit card debt, whether payment is by mail, telephone, electronic transfer, or otherwise
Source: White House and Sen. Chris Dodd
Key Dates:
February 22, 2010:
Most provisions of the credit card bill go into effect.
August 20, 2009:
The following provisions go into effect:
–45 day notice requirement for rate
–21 day statement mailing requirement
November 22, 2009:
Federal Reserve Board to issue guidelines on the following provisions:
–Establishment of a toll-free credit counseling phone number
–Report to Congress on financial literacy programs
August 22, 2010:
The following provisions go into effect:
–Interest rate reduction consideration requirements
–Reasonable and proportional penalty fees
–Gift card protections
February 22, 2010:
Federal Reserve Board to issue a final rule on the following provisions:
Interest rate reduction consideration requirements
Preventing deceptive ads for credit reports
Gift card protections
May 22, 2011:
The following provisions go into effect:
Review and report on consumer credit plans and regulation
Source: Defendyourdollars.org