Credit Card Reforms Coming Soon

by Dual Income No Kids on October 12, 2009 · 0 comments

One of the most indelible images of the first few days of college is the ubiquitous presence of local banks on campus. These banks would recruit students to sit at a booth outside popular spots on campus and offer free shirts, Frisbees, mugs, whatever, in exchange for filling out a simple credit card application. A guy I knew said he mastered the art of filling out dubious applications in exchange for the free swag. Although I think they eventually figured him out and banned him from participating. But there was no shortage of students in line, eager to fill out an application in exchange for some stupid item worth no more than $5 that wouldn’t garner a second look if seen in a store.

That might be changing though. This year, Congress passed and President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act of 2009 in May. The first of the provisions set forth by that new piece of legislation came into effect August 20th, with more substantive reforms expected to go into full force starting in February 2010. The aim of the CARD Act (as it’s referred to) is to address some of the issues experienced by consumers regarding the use of credit cards and some of the problems that the American public has run into, problems that contributed to the recession we’re currently pulling ourselves out of.

As I mentioned above, the first of many reforms targeting the credit industry were enacted this past August 20th. Some of those reforms include:

* Lenders must give consumers at least 45 days before enacting any “major” changes to the contract
* Lenders must mail bills at least 21 days before payment is due
* Consumers have the right to reject interest rate increases
* Consumers have the right to pay off their existing balances under their old interest rate within 5 years

These, however, are just the first steps. This upcoming February, the second wave of reforms will go into effect, although there is a push to move up the start date to this upcoming December, although that is unlikely to happen. Some of those reforms include:

* Penalty rate increases can’t occur on an account until the consumer is at least 60 days late with payments
* Entry promotional rates have to have a term of at least 6 months and the full terms of the promotional and regular rates must be “clearly” disclosed to the consumer
* If a consumer remains in good standing with the lender, rate increases cannot occur within the first year of an account being opened
* New accounts will be harder for consumers under the age of 21 to open without a co-signer or verification of independent income
* Double-cycle billing will be illegal

Those are just a few of the many provisions to be enacted on February 22nd, 2010, which, as you can see, is more extensive and far-reaching than those that were put into effect this past August. Also, you’ll notice I put a few of the words in parenthesis, as this bill (like a lot of legislation it seems) is vague in some parts. What exactly is a major contract change? What is clear disclosure? While Congress attempted to reel in some of the more outrageous credit company practices, there is some wiggle room associated with the legislation, and it will be interesting to see what the reality is after the full bill has been put into action.

Hopefully, most of these provisions won’t have any impact for us as consumers. Interest rates shouldn’t matter, because you shouldn’t carry a balance on your credit cards. Same for most terms of the credit agreement, as well as the double-cycle billing problem and the penalties associated with late payments. But as a lot of us has experienced, there are times in which carrying a balance on a credit card is an unfortunate necessity. If that is the case, then these changes will be welcome.

Perhaps the biggest impact will be on young consumers. Already, changes to how credit scores are calculated have hurt those just starting their financial lives (by placing more weight on how long credit accounts have been opened; 3 years is the magic number). Now, with having to have a co-signer who is of age or proof of independent income, those under the age of 21 will have to wait to establish their credit history. This may not be a bad thing, however, as the average college senior with at least one credit card leaves school with over $4,000 in credit card debt. Not a good way to start your journey in personal finance and wealth building.

I know credit cards are a controversial topic within the personal finance community. How do you feel about these changes?

-Michael
Twitter: @michael_dink

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