A Look Inside The Credit Card Act of 2009

A new law that places significant restrictions on credit card companies’ ability to increase interest rates and charge a variety of fees was passed swiftly by Congress earlier this year. Consumers will begin seeing new protections take hold by this fall.  Following is a brief rundown of the bill’s key provisions and what they might mean for the millions of Americans who carry balances on their credit cards from month to month.

Highlights of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 include:

Limits on interest rate increases.

Interest rate increases on existing credit card balances will be allowed only under certain conditions — i.e., the cardholder has fallen 60 days behind in minimum payments, a promotional rate expires, or the card carries a variable rate. Interest rates on new cards cannot be raised for the first year, and cardholders must be given 45 days notice of any significant change in contract terms, including a rate increase.

Elimination of “universal default” and “double billing” practices.

Universal default, the practice of raising interest rates on cardholders based on payment records with other creditors, and “double billing,” the practice of computing finance charges based in part on balances from previous billing cycles, will no longer be allowed.

More time to pay bills.

Card issuers must mail statements at least 21 days before they are due.

Highest interest balances paid first.

When cardholders have accounts with varying interest rates — for purchases versus balance transfers, for instance — any payment above the minimum amount due must be applied first to the balance with the highest interest rate. Current industry practice is to do the opposite, thus extending the debt pay-off time.

Limits on over-limit fees.

Cardholders must give their prior permission to process transactions that would place their account over the limit.

Plain language disclosures.

Card companies must spell out clearly how long it will take cardholders to pay off an existing balance — and the total interest cost — if the consumer paid only the minimum due.

Restricts credit to minors.

Card issuers cannot offer credit to consumers under age 21 without first verifying their ability to repay the debt or obtaining the signature of a parent or other adult.

The Impact on Consumers

While the law’s focus on controlling interest rates and fees should benefit millions of credit card users, opponents of the bill have argued that the new law will make credit cards less available and more costly for all users. Credit card issuers have warned that by imposing restrictions on their ability to raise interest rates as a means of managing risk, they will be forced to make it more difficult for some consumers to obtain credit cards at all — and more costly for those who do obtain them.

Much can change in the intervening months before the new law takes effect, however credit cardholders can take steps now to ensure that their access to affordable credit is preserved.

Research a better deal.

For individuals who are unhappy with the terms of their current credit card contract, now may be an opportune time to shop around for a better deal. Cardholders can start by negotiating with their current card issuer and/or by researching other offers. Some card companies are already taking steps to comply with the new law, by allowing more time to make monthly payments or eliminating universal default policies. Users can track which cards are in compliance with the new rules at www.billshrink.com/credit-cards/bill-of-rights.

Know your credit score.

The higher your credit score, the more negotiating power you will have with creditors. Before launching a campaign to find a better card, obtain a copy of your credit report and credit score at www.annualcreditreport.com. Credit reports are free, while credit scores can be purchased for a nominal fee (less than $10).

Pay off debt before investing.

Given current market conditions, paying off credit cards before investing is a sound financial decision. Even if the market were performing in an historically average range, with gains of 8% to 9% annually, as measured by the S&P 500, paying off debt would still be your better bet.

This article was prepared by Standard & Poor’s and is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor or me if you have any questions.

Securities offered through LPL Financial, Member FINRA/SIPC.

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