Creditcard smallAuthor: LiveCheap.com

Earlier this May, President Obama signed into law the Credit Card Responsibility Accountability and Disclosure Act.  The new law had sweeping changes for the credit card industry after years of shady practices resulted in millions of consumers being negatively affected financially.  The law is set take effect in February although the Senate has a amendment that would make it apply immediately.  For a list of all the major changes read “New Credit Card Law Summary” CCRAD Summary and feel free to distribute it and republish it with proper attribution.  The following ten changes are likely to have the largest impact on you:

Interest Rates:

The biggest changes come with restrictions on the ability of credit card companies to impose interest rate hikes:

1) Credit Card companies need to give 45 days notice instead of 15 days

2) Existing balances will not be subject to the new rate

3) Cardholders can opt to cancel and continue with the same interest rate and minimum payment

4) Increases cannot be based on information from other creditors from a credit report

5) If consumer pays on time for 6 months after rate increase, rate must be returned to old rate

These changes are monumental for the credit card industry.  A huge portion of their profits were derived from charging $39 late and over the limit fees on people who habitually forgot to pay on time.  And with default rates of 29.99%, they raked in the profits once someone tripped up.  The new laws make it much tougher which is why credit card companies have rushed out to raise rates on tens of millions of credit card accounts before the law goes into effect.

Interest and Fees:

6) Eliminates the dubious practice of Double-Cycle billing, where interest was calculated based on the average balance over the last two billing cycles.

7) Payments made on partial balance amounts before the due date do not incur interest

8) Cardholders can opt out of being subject to over-the-credit-limit fees in writing and even if they don’t, there can only be one fee per billing cycle now

The practice of Double-Cycle billing meant that even if you paid your credit card on time after previously carrying a balance, you still got hit with interest.  Since interest was charged even if 99% of the balance was paid, there was very little incentive to pay more than the minimum payment. The elimination of interest on the full amount due if a partial amount was paid will greatly reduce costs for those that pay a significant portion of their balance but not the full amount.

The changes in the over-the-limit fees are huge for those that often unknowingly were up against their maximum.  Many critics have cited the fact that going $5 over the limit generated a $39 fee.  Credit card companies had often charged 5 or 6 over the limit fees without consumers even knowing they were over the limit.

Payments:

9) Payments are first applied to the highest interest rate, then to the next highest interest rate

10) Payments are due no earlier than 21 days after the bill is sent; increased from 14 days

Part of the strategy of credit card companies was to send bills with 14 day due dates knowing full well that it might take 3 or 4 days for the consumer to get the bill.  With 3 or 4 days to mail it back, a consumer sometimes had as little as 6 days to make a payment.  In addition, banks would offer teaser rates of 0% on transfers but charge exorbitant rates on new purchases. Any payments were used to bring down the teaser rate balance before being applied to the higher rate balance. That practice is now over. Payments now apply to the higher rate balance first.

The law which had excellent intentions for consumers has some unintended consequences.  Credit to marginal groups has been reduced greatly.  In addition, interest rates for those with good credit is increasing dramatically.  Also, credit card companies are implementing annual fees that are larger.  The plus for consumers in the long haul is that credit will be far less attractive which will result in lower levels of debt.  In the short run however, the 9 month period before it becomes effective is giving the credit industry one last chance to change the rules of each cardholder agreement.

LiveCheap.com helps consumers make better, smarter, cheaper decisions and Live the Good Life…Cheaply. From helpful daily tips on how to lower your expenses, to in-depth articles on Personal Finance, Cheap Travel, and Shopping, LiveCheap helps people in all aspects of their lives. Like this article? Subscribe today to get all of LiveCheap.com’s articles.

DID YOU LIKE THIS ARTICLE? SHARE IT WITH FRIENDS!

Be Sociable, Share!
  • Twitter
  • Facebook
  • email
  • StumbleUpon
  • Delicious
  • Google Reader
  • LinkedIn
  • BlinkList

Tagged with: • • • • • • • • • • • • • • • • • • •

Filed under: Debt Settlement

Like this post? Subscribe to my RSS feed and get loads more!