Well, the date is finally here; August 22, 2010, six months after it was signed into law on George Washington’s birthday. This is the date many of the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009, familiarly known as the Credit Card Act, or just the CARD Act, actually go into effect, curbing the activities of credit card issuers.
We consumers now have a few more credit protections than we did before, but to get the Act passed, Congress had to water down the wording somewhat. It would not do to pass a law that would put many of Congress’s biggest campaign contributors out of business. So, there are still a few areas left for issuers to extract profits.
Students
Before this law went into effect, students were sent credit cards that they ran up like free money while the parents got stuck with the bills, since they were under age. Now, students under 21 years of age cannot qualify for a card without a co-signer. How will the issuer know the applicant is a student? They will likely only have income from summer employment. The real qualifiers are the applicant’s age, and their income.
Interest Rate Hikes
The new law does not protect consumers against interest rate increases. It does protect them against increases on existing balances, but as long as the card issuer notifies the consumer at least 45 days in advance, interest on new purchases can jump considerably.
This is supposed to give the consumer the option of jumping to another card for new purchases. The consumer has three billing cycles to decline the new terms, close the account to future purchases, and pay off their balance at the old rate and payment schedule.
Payment Allocation
If you have separate interest rates in force for old balances and new purchases, be aware that the CARD Act requires the card issuer to apply the minimum payment amount to the greater balance, which most likely has the lower interest rate.
The CARD Act requires payments to be applied to the highest-rate debt on the account, so watch carefully that any payments exceeding the minimum payment are “accidentally” applied to the lower rate balance.
Universal Default
Under the old shell game, issuers could raise a consumer’s interest rate if they were late on a totally unrelated account, like a utility bill. This is now prohibited under the new law.
But card issuer’s legal wizards have left some language in some offers that will activate a penalty APR. Some of the reasons are exceeding credit lines, credit report information, and bounced or late payments. Some catch-all language might be “market conditions”, or “at any time for any reason.”
Read the small print.
Penalty Rate
If a consumer is more than 60 days late on a payment, the card issuer can initiate a penalty rate, which averages nationwide slightly less than 30 percent. That means for every thousand dollars that remains on your credit card by the end of the year, you will owe another $300 in interest, or nearly an additional one-third of your balance. This is the way card issuers generate cash flow and keep consumers imprisoned in their cycle of debt.
The new law provides a way back down the interest ladder. It is meant to require the credit issuer to return the customer to their previous interest rate after six consecutive months of timely payments. In reality, the law states that the card issuer is “supposed to” review and reduce a cardholder’s rate after six months of consecutive on-time payments.
The law also states that this review must include market conditions (what others are charging) and the creditworthiness of the card holder. This gives the card issuer an out if you caught up on the penalty account but your other accounts are still behind.
Another method card issuers have been known to use is a technique known as “pigeonholing” where your payment arrives on time, and due to the card issuer’s workload, it is not posted until after the due date. Remember one late payment will result in a lot more income for at least six months for the card issuer while you straighten things out.
It is more important than ever to keep records of the exact dates payments are made. Sending a check in the mail has no basis for verifying the date it was received, since the card issuer will discard the envelope with the postmark proof as quickly as possible, and the date on a check can be any date.
Paying a bill by electronic banking will issue recordable dates of payment receipt. Remember that many banks still issue a bank check that is mailed, and the process can take up to four days until the check is in the mail. Be sure to add the four days plus a comfortable mail delivery time for your payment to be received.
The language of the new law is loosely worded. Expect some creative moves when it comes to the card issuer backing off penalty rates.
Mail Notification
The highest court has judged that putting a notice in the U.S. Mail is proof of delivery, whether or not the addressee receives it.
The new CARD Act requires payments to be accepted as timely when paid before 5pm EST on the due date or mailed at least 7 days before the due date.
That concept seems to work fine for businesses that say they notified you, but doesn’t work that well for consumers mailing payments.
Discontinued Cards
The 45-day rule will “probably” apply if the card issuer decides to discontinue your card. The law is not clear about this circumstance, but issuers will most likely notify the consumer 45 days ahead to avoid running afoul of the law. That’s good news for a consumer standing at a register with a big purchase.
Added Fees
Credit card issuers have lost a bundle of expected revenue with this new law. Estimates put the loss at around $12 billion per year. It comes at a time when banks are already in bad shape because of the housing market, double the number of defaults from unemployed workers and others, and consumers cleaning up their balances.
It is predictable that inventive fees not mentioned in the new law will surface. There are countless fees that can be added to your bill, and interest rates can soar, if everyone in the credit market does the same and they notify you 45 days ahead.
Although the prime rate for banks is low now, as it cycles upward, consumers can expect 45-day notices from their fixed-rate card issuer that they will be switched to a variable rate, tied to the prime rate. Variable rates rise and fall with the economy and will not require the 45-day notice as the prime rate climbs.
Be careful of ordering merchandise online. If the merchandise comes from a foreign retailer or American territories, you can incur foreign transaction fees, even if the merchant allows you to pay in U.S. currency.
Fee Avoidance
Be your own consumer advocate. Consolidate your credit to one or two widely accepted cards with the lowest interest rate (beware of the balance transfer fee). Join a credit union (lower interest rates). Drop annual fee cards. If you want to keep some cards, reduce your credit used to below 10 percent of your available credit to preserve your credit score. For cards with inactivity fees, swipe them at a convenience store once a year (check the inactivity period). If one of your issuers offers a rewards program, take the cash-back option.
Pay your bills on time. Read the fine print. Read each piece of mail from your card issuers. Stand up for your rights. Play hardball. Speak to supervisors. Threaten to take your business elsewhere if they don’t retract an unjust fee, and do it if they don’t (I also like emails to the president or CEO, factually detailing why you left).
The CARD Act was a big step in the right direction, but there will always be loopholes discovered by highly-paid legal eagles working against you.
