In 2008, new credit laws for lenders were passed and scheduled to take effect in 2010. This was sweeping legislation that was a long time coming and was in response to overwhelming consumer complaints about predatory practices of credit card lenders.
During the period of time between passage of the bill and activation of the new regulations, many consumers had credit ratings damaged by lenders who were scrambling to position themselves for maximum profit when the new law took effect.
Now the new laws are in place, it’s important to understand what has changed and also to recognize new loopholes that may have been created.
Previously, a lender could raise interest rates on credit card balances at will. This included increasing interest charged on previous balances. Although lenders were required to give a reason for the rate increase, any reason was good enough to meet that requirement.
You did not have to be late with a payment as a cross default allowed your lender to raise your interest rate if you were late on any other payment to any other company.
Today, your credit card lender cannot change your interest rate at will. The banks cannot raise the interest rate on previous balances unless your account is at least 60 days past due. This is now referred to as a penalty rate but cannot be applied at will. If you make 6 consecutive on time payments, the interest rate on previous balances must be returned to the lower APR.
Clarity and Disclosure
Credit card lenders have long been famous for the legalese in their notifications to customers. Print so small it had to be read with a magnifying glass was common and the way in which notice of an impending change in interest rate or fees was written made it difficult to understand what change was being made.
Today, the laws require lenders to provide you with notification that clearly explains any change being made to your account. The lender must clearly disclose all fees, rates and penalties and must show on each statement how much you must pay monthly to eliminate your debt in three years.
In recent years, an increasing source of credit card profit has been in the fees charged by lenders. With annual fees, over limit fees, account activation fees, late fees, etc, your credit debt could grow substantially even though you made no further purchases.
Consumers with lower credit ratings frequently were the target of such unregulated fees. Banks that specialized in granting secured credit cards to consumer with bad credit often applied fees that completely filled the credit spending limit of a new credit card before the card was ever used for a purchase.
This problem was partially address by the new laws as lender cannot charge fee that exceed 25% of the spending limit of a new account during the first year the account is open.
Over Limit Fee Abuses
Years ago, if you attempted to make a purchase that exceeded the spending limit available on your credit card, your charge would be declined. In recent years, lenders began approving over limit purchases but added a substantial over limit fee to that transaction.
Consumers who made a purchase that exceeded their account limit by $5 often discovered a $35 charge added for the privilege of exceeding the credit limit.
The laws require lenders to allow consumer to opt out of over limit charges altogether by telling the bank not to approve any charge that exceeds their spending limit.
Lenders cannot charge multiple over limit fees in one billing period today. This eliminate the old predatory practice of charging an over limit fee for an account that was pushed over the spending limit by finance fees imposed by the lender.
Student Credit Card Changes
College students were a prime target for large credit lenders who often set up kiosks at campus registration venues to obtain new customers who were just beginning their lives as adults. Credit cards were distributed widely with no credit rating necessary, no income qualifiers and no co-signor required.
By 2008, it was estimated that 85% of college students had at least one credit card in their name. The average balance exceeded $3000. For the lenders, college campuses were a gathering of future credit users that could be lured in and would become loyal customers throughout their adult life.
In reality, many college students began their working lives burdened with credit debt and often with damaged credit files due to not having income to pay off credit cards when due.
The laws no longer allow lenders to prey on high school and college age students. Lenders may not issue a credit card account to anyone under the age of 21 without either a co-signer or verified income that can pay the debt.
The lenders are not longer allowed to give gifts to students for filling out a credit card application or to promote their credit accounts on or near campuses or at college sponsored events.
Potential Disadvantages Still Exist
The Credit Card Accountability, Responsibility, and Discloser Act (CARD) is a great step forward. However, there will be pitfalls that have not been address in the new credit laws and some that will be new loopholes created by the law and exploited by credit lenders.
Making Minimum Payments
The news laws require lenders to apply your monthly payments to the balance carrying the highest interest rate. That’s a great step but it only applies to the amount of payment made over and above the minimum payment required.
Frequent Account Changes
When the new credit laws took effect, many credit lenders stopped all of their card offers and restricted new accounts to those consumers with the highest credit scores.
The lenders are now beginning to compete again for credit customers and are changing their credit card offers both to meet the new requirements and to take advantage where they can.
The annual fee has been re-introduced, inactivity fees have been added, and balance transfer and foreign transaction fees have been increased. It’s likely that more fees and hidden fees will be added to consumer accounts as lenders find their way through the new restrictions.
Lenders are now strictly required to notify you of changes to your account well in advance of the change. This gives you the option of opting out or of changing your buying habits with that account. For consumers, this means you must read the information sent to you by your lender in order to be aware of any changes being made on your credit card account.
If you receive a notice of an impending change in the interest rate on your card or of addition of a new annual fee, you now have the right to decline that change.
If you opt out, the lender may choose to close your account but may also choose to allow you to opt out if you have been an active customer in the past. If the account is closed, you can still pay off the balance in the same terms and time frame originally in place for that credit card.
The new credit laws provided long needed protection for credit card users and put a stop to the most abuse lending practices. However, a consumer is only protect if he understands the new laws and pays attention to what is happening with his credit card account.
In the months since the new credit laws took effect, lender have started to add more benefits to their new credit offers. Annual fees are being reduced as it becomes clear consumers don’t like them and banks requiring those fees are losing customers to banks who waive annual fees.
The days of carrying a dozen credit cards in your wallet are over. Consumers today choose 1-3 credit cards to use and monitor those accounts closely, Credit terms will continue to become more competitive as lenders once again position themselves to attract more credit card users.