Credit Card Users Beware of New Federal Law Changes

by Rick Dougherty, CPA

A new federal credit-card law, H.R. 627, titled the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, takes effect Monday February 22, 2010. The legislation could potentially erase billions of dollars paid by consumers each year in credit card fees and interest charges. But credit card users should be aware that credit card issuers may utilize new tactics that could prove costly for even the most cautious cardholders.

Some important changes included in the new law are:

Credit card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment.
Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee.
Unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.

In order to compensate for potential lost revenue from credit card users that may result from these law changes, credit card companies are likely to respond with a number of their own changes:

Increasing interest rates. As long as credit card companies inform you ahead of time and don't make any sudden rate changes, they are mostly free under the law to charge higher interest rates. They can raise the rate on new purchases made as long as they provide 45 days notice that they are doing so.
Switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are low now, but give the companies flexibility to collect a higher rate in the future as long as they alert customers to the terms now. Many credit card companies have already sent out notices that change the terms of the card contract to a higher or variable rate.
Increasing annual fees, or charging additional fees for extra services such as requesting a year-end itemization of all your purchases or printing paper statements.
Penalizing card holders for late payments via "rewards" or "bonus miles". Some credit card companies have recently added fees related to "rewards" or "bonus miles" earned with card purchases. Cardholders who pay late will lose their "rewards" or "bonus miles", which can then only be reinstated if the cardholder pays an additional fee.

Credit card users may be able to help reduce the negative impact of changes made by the credit card companies by answering the following questions:

Is there a way to avoid the annual fee? Some credit card companies will waive their annual fees under certain conditions. For example, if the credit card user spends a certain amount on their card within a 12 month period.
Should I join a credit union? Credit unions often offer lower interest rates than large banks. There are more than 8,000 credit unions in the U.S., and the criteria for joining some of those unions are as simple as your Zip Code.
Should I switch to a "cash-back" incentive card? As credit card companies increase fees and penalties related to incentives such as "rewards" or "bonus miles", credit card users may find that "cash-back" incentive cards provide more value.

In today's difficult economy, credit card users will be wise to consider how the law changes included in the CARD Act of 2009 may affect them, and what steps they can possibly take to adjust to those changes.