Feb. 16, 2010— -- Next week new credit card provisions from the 2009 Credit Card Accountability, Responsibility, and Disclosure Act (CARD) will take effect, making it easier for consumers to understand their credit card bills and how interest charges are determined.
The new rules will affect millions of consumers. The average person has five credit cards and the average household with at least one credit card has more than $10,000 in credit card debt, according to a 2009 Nilson Report.
Overdraft fees generated $25 billion to $38 billion for banks last year, Hobson said. Consumers can be automatically enrolled in overdraft protection, but with the new Credit CARD Act, customers must now specifically request it.
Should a customer enroll, overdraft fees can only be applied once during a billing cycle and the card company must let you know how much it will be, Hobson said.
The customer has the right to opt out of overdraft protection at any time. But these new rules only apply to debit cards and not to overdraft fees from checks or electronic transfers.
Hobson recommended that consumers never ask for the overdraft protection for debit cards and opt out of it for checking accounts.
Two of the Credit CARD Act changes are already in place.
Consumers now have 21 days to send their payments in instead of 14 and credit card companies must give consumers 45 days notice if their terms change, instead of 15 days.
Although Hobson notes that one important exception to the 45-day notification rule is if your credit card company decides to reduce your credit limit – the company can do that without any warning.
Should this happen, Hobson said to call the company and ask for it to be reversed. If the company refuses, then pay any remaining balance as soon as possible since lowering your credit limit could affect your credit score.
On Feb. 22 another change will take effect that should help consumers better understand their credit card terms and debt, Hobson said.
New Credit Card Rules
Beginning on Monday, credit card bills must make clear how long it will take the consumer to pay off the balance and how much interest the consumer will pay if he or she only pays the minimum amount every month.
For example, if a consumer has $5,000 in credit card debt with a 14 percent APR, the credit card company must disclose that it would take 10 years to pay off the balance plus nearly $2,000 in interest fees if the consumer only paid the minimum balance every month.
After the Credit CARD Act was passed in May 2009, credit card companies pre-emptively raised certain fees and interest rates in order to replace the $50 billion in revenues they expected to lose, Hobson said.
In fact since June 2009, the top 12 banks and credit unions have increased their rates by approximately 23 percent, Hobson explained.
While the Credit CARD Act does not put a cap on increased interest rates, credit card companies must give customers 45 days notice on any change and they are not allowed to raise the current interest rate on consumers' existing debt, Hobson said.
However, there are a few exceptions. If a consumer's APR is a variable and tied to an index, then the interest rates on existing debt can be raised.
Additionally, if a consumer is more than 60 days late making a payment, then the credit card company can increase the interest rate. But if the consumer then makes on-time payments for the following six months, the company must roll back the interest rate to the previous level, Hobson said.
Also, consumers can no longer be charged an additional fee for paying over the phone, by an electronic transfer or by mail, Hobson said. An extra charge will only apply if the consumer uses live services to expedite a payment.
Although the Credit CARD Act now requires 45 days notification of account changes, Hobson said it is still the consumer's responsibility to monitor all of the terms of their credit card statement.
The practice of universal default is also banned for existing credit card balances, Hobson said. This is when a card user's interest rate is increased based upon payment records for unrelated accounts, such as utility bills.
Changes Affect College Students
The last thing a college student needs is more debt. A Sallie Mae study found that in 2008, college seniors with at least one credit card graduated with an average of $4,138 in credit card debt.
To protect young people from incurring debt the Credit CARD Act has made it more difficult for college students to get a credit card, Hobson said.
Credit card companies can no longer offer a card to someone under 21 without a co-signer or proof of proper income, Hobson explained. Nor can the company increase the limit on the card unless both the co-signer and the student agree. Offering inducements to sign up for cards - such as free t-shirts or beach towels – on or near a campus are also banned.
Hobson recommends that if your child does need a card, to add him or her as an authorized user on your own credit card.
Being an authorized user will help teach them to live within their means and also help them build up their credit history and could improve their credit score if you make on-time payments, Hobson said.