New credit card legislation

The good, the bad and the ugly

According to a White House fact sheet, nearly 80% of American families have at least one credit card, with 44% of them carrying a balance. And every year these families pay a staggering $15 billion in penalty fees, resulting largely from unfair credit card practices. Such practices are expected to end when the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 becomes law in February 2010. This legislation is expected to put an end to certain actions that may have infringed on consumer rights.

Although the act will lead to several consumer benefits, it could also produce a few negative consequences and even serious drawbacks. This is because while some card issuers already comply with the responsible lending practices outlined in this legislation, others do not and will be looking for new ways to build revenue. Here are the facts:

The good

Fairer interest rates and billing practices:

• No interest rate increases can be made in the first 12 months after you open a credit card account.
• Card issuers can't apply a rate increase retroactively to existing balances. Only purchases made on or after the date of the rate increase will be subject to the new rate.
• Issuers will have to give cardholders a reasonable amount of time to pay their monthly bills — at least 21 calendar days from the time of mailing.
• Late fee traps, such as weekend deadlines, due dates that change each month and deadlines that fall in the middle of the day, are no longer allowed.
• The balance in a previous month can no longer be used to calculate interest charges on the current month (called double-cycle billing).
• Credit card companies will be required to apply payments in excess of the minimum to the highest interest balance first.
• Issuers will need to obtain permission from consumers before processing any transactions that would place their accounts over the limit and result in fees.
• Improved communication: Advance notice of 45 days will be required before any significant changes can be made to the interest rate and other credit card terms.
• Statements will need to display how long it would take to pay off the existing balance, as well as the total interest cost, if only the minimum amount due were paid.
• Statements must also display the necessary payment amount and total interest cost to pay off the existing balance in 36 months.
• Protection for young consumers: Credit cards can be issued to people under the age of 21 only if they have adult co-signers or show that they are able to repay the debt.
• College students will have to receive permission from parents or guardians in order to increase the credit limit on joint accounts held with those adults.

The bad

During this period of industry transition, there could be some unwelcome consequences. For example, in order to make up for lost profitability caused by new legislation, many issuers may:

• Begin to charge annual fees or raise other fees, such as those for balance transfers
• Cut back on rewards and perks
• Raise general interest rates
• Reduce or eliminate interest-free grace periods
• Grant credit to fewer applicants
• Lower credit limits

In addition, it could become harder for young people to obtain credit or establish a positive credit history, making it more difficult for them to become financially independent.

The ugly

Who will pay for the credit card industry's lost revenue? Unfortunately, it will probably be the more responsible clients of the less responsible credit card companies.

Some card issuers are already aligned with the responsible lending practices of this legislation. Others are not and will need to take steps to subsidize the loss of penalty fees and rate hikes that can no longer be collected from less responsible cardholders.

This means that consumers who pay off their credit card balances in full each month, as well as those who regularly make payments on balances they carry, could end up paying higher interest rates and annual fees while earning less valuable rewards.

What you can do

• Take a close look at your card and evaluate all your options. If your card issuer is already aligned with most of the new legislation, it makes sense to keep the card. If not, consider alternatives, including a new low-rate credit card or a home equity line of credit.
• Watch for any letters from your credit card issuer. They could be notifications of rate increases or other changes to your terms as the issuer prepares to comply with the new rules. If your benefits are eroding or your fees and rates are going up, pursue other credit options.
• Consider cashing in your rewards and perks now, before the rules change and such benefits are potentially reduced or eliminated.
• If you apply for a new credit card, carefully inspect the terms before you sign up. A few card issuers, including Ameriprise Bank, have already been following the more responsible practices set by this legislation, which means rates and benefits you can count on down the road.

Contact your financial advisor to find out what additional steps you can take to prepare for this new legislation and to discuss how responsibly managed credit card debt can fit into your financial picture.