Final Rules Under The Credit CARD Act Provide Boost to Consumers

The final act of a three-part set of credit card reform rules is now in effect.

So what's the last installment of The Credit CARD Act of 2009, which took effect Aug. 19?

Less painful punishment

All penalties and fees must be reasonable and proportional to the violation for which the penalty was assessed. The good news here is that penalty fees, typically $39 will likely drop to $25 and there could be fewer of them, experts say.

A get out of jail card

The second big change is that credit card issuers now must re-evaluate, every six months, any interest rate increases they have made to see if factors have changed that warrant a reduction in the rate. So, if you do the right thing, like paying on time, you could resume paying your original, lower interest rate.

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Some nasty loopholes remain though

While this sounds like good news for consumers, Nick Bourke, director of the Pew Health Group's Safe Credit Cards Project, says there is a huge loophole. "The Federal Reserve refused to regulate penalty interest rate charges. Consumers have a limited right to cure the penalty and return to their original rate. But if a penalty rate is imposed and you don't immediately pay on time and do so for six months, you may be faced with paying that higher rate forever," says Bourke.

You could still have interest rates that double a minimum payment of $70 to $150, for example. "Regulators missed a chance to form comprehensive penalty interest rate protections. Though the rules created some important safeguards, the Federal Reserve refused to control the size or duration of penalty rate increases on existing balances. We urge them to ensure that all credit card penalties are reasonable and proportional," says Bourke.

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Furthermore, says Curtis Arnold, founder of CardRatings.com, "Asking issuers to re-evaluate your rate every six months sounds good on paper. But, realistically, how many issuers are going to feel compelled, based on that review, to actually reduce your rate?"

Despite cries for transparency, the legislation doesn't require that the review process be revealed to you. "So it doesn't have transparency yet, and the concept of fairness is still 'self-report'. You still need to be the one to determine what is fair, by doing your homework, reading, researching and making comparisons, to decide what is fair and in your best interest," says Martha Doran, an accounting professor at San Diego State University.

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Landmark legislation

Part three puts the finishing touches on legislation that significantly changed the credit card landscape. The Credit CARD Act was signed by President Obama in May of 2009.

Part one, which took effect Aug. 20, 2009, required that consumers receive 45 days' advance notice of interest rate increases and significant changes in terms; provided consumers the right to reject increases and other "significant changes," and provided a minimum 21-day payment period for late fees, grace period, credit reporting.

The bulk of the Act took effect Feb. 22, 2010. Here are highlights.

No more surprises

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Consumers got protection from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance.

Rein in the young folks

Creditors can no longer issue a credit card to the under 21 crowd unless he or she has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so.

Crack down on fees

Your credit card issuer must obtain your consent before charging fees for transactions that exceed the credit limit.

The law limited high fees associated with subprime credit cards. Creditors are also banned from using the "two-cycle" billing method to impose interest charges and are prohibited from allocating payments in ways that maximize interest charges.

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Are you better off?

The question though, is more than a year later, what has all this wrought? Most of the practices deemed "unfair" or "deceptive" by the Federal Reserve have disappeared, according to research by Pew Health Group's Safe Credit Cards Project. Issuers have eliminated practices such as "hair trigger" penalty rate increases (disproportionate charges for minor account violations), unfair payment allocation, and raising interest rates on existing balances.

There's plenty to applaud. According to Pew, less than 25 percent of all cards examined had an overlimit fee, which is down from more than 80 percent of cards in July 2009. Additionally, mandatory arbitration clauses, which can limit a consumer's right to settle disputes in court, are now found in 10 percent of cards, compared with 68 percent previously. Fortunately for consumers the predictions that legislation would spawn the growth of new fees have yet to materialize. There was minimal change in the number of cards that include an annual fee (down 1 percentage point from July 2009 to March 2010). During that period, the median size of these fees increased from $50 to $59 for banks and from $15 to $25 for credit unions.

Winners and losers

Then too, change hasn't come without a price tag. "Interest rates on new cards are expected to rise in order to raise more revenue for credit card companies who are losing billions without inactivity fees," says Scott Gamm, founder of HelpSaveMyDollars.com. Some suspect there will also be fewer teaser rates of 0-3 percent, at least temporarily.

Pew's research reveals a sharp rise in cash advance fees, continued widespread use of other penalty interest rates and an emerging trend of credit card companies failing to disclose penalty interest rates in their online terms and conditions.

An unintended consequence of the legislation is that it is harder for those with bad credit to get approved for a card, and those with good credit find it harder to get a card with low fees/low interest rates/rewards, and even consumers with great credit are sometimes seeing their rewards slashed, which would have been unthinkable pre-CARD Act, says Joel Ohman, a certified financial planner and founder of CreditCardChaser.com.

Perhaps the biggest winners will be prime customers. "They may get better rates as increased competition in these segments pushes up rewards and pushes down fees and APRs," says Scott Crawford, founder of DebtGoal, which offers online personal debt management.

Reformers are not content to sit on what is mostly a victory for consumers. A hit list still exists. Says Bourke, "Federal regulators should enforce existing regulations that require companies to disclose full and reliable credit card penalty information and they should prohibit issuers from charging penalty interest rates that are higher than initially disclosed when the consumer opened the card account."

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