27th

March, 2012

Credit Card Act of 2009 In Review (Part 2)

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Part two of our extensive look at the positive and negative effects of the Credit Card Act of 2009.  You can find part one of this piece HERE.

Protecting the Consumer

When discussing interest rates, a lot of different arguments can be made and various factors can be cited. But one thing is undeniable. The Credit Card Act restricts the behavior of card companies when it comes to raising your interest rate. They can only do it in response to economic events or as a reaction to a change in your credit profile or your track record for making timely payments.

Data compiled by the Center for Responsible Lending indicates that while the interest rates in advertisements mailed to customers have risen, the actually rate that most cardholders wind up paying has actually gone down. Fees have been reined in, for sure. It also appears that more people are being offered credit – which is a plus. That could be credited to an improving economic outlook, the efforts of banks trying to win back customers lost during the height of the credit crisis, or to impetus provided by the Credit Card Act.  I suspect that it’s a combination of all three.

While much of the analysis of the CARD Act is up for debate, even the American Bankers Association agrees that the Credit Card Act benefits consumers, according to Josh Frank, a senior researcher for the Center for Responsible Lending. That’s saying a lot, since bankers are the ones who were the most vocally and passionately opposed to passage of the bill. Frank also made another observation that other analysts often overlook, explaining that since the CARD Act forces card companies to be transparent about their pricing it spurs competition. As we all know, competition is always good for the consumer because it brings down prices and elevates the benefits we receive from products and services.

So while we may still be seeing high interest rates, for instance, we have also seen that card issuers are rolling out some very robust rewards programs and cards with other valuable perks. My hunch is that this is an attempt by banks to compete in the post-CARD Act environment – without sacrificing the revenues they make from interest payments. Even if we’re paying an extra point or two, we’re also getting some great new benefits.

The Timing of Monthly Statements

All I have to really do to see signs of positive improvement due to the CARD Act is to look at my monthly statement. It is much easier to read, and the amount I’ll wind up paying if I only pay the minimum each month is very conspicuous. Thanks to the Credit Card Act I also get my monthly bill sooner – which helps me pay it on time. I used to receive belated statements and sometimes it was nearly impossible to pay them before triggering a late fee. That kind of scheduling was intentional on the part of banks who were trying to set people up for late payments and lucrative penalties. It was wrong and unfair for them to do that, but now they have to mail your statement three weeks before the due date.  Some things to consider:

  • That may not seem like a big deal to lots of people. Consider however a scenario where a cardholder takes advantage of a 0% introductory offer by transferring a large balance to their card. Or maybe rather than doing a balance transfer they take advantage of the low rate to withdraw a hefty cash advance.
  • If they make one late payment – and it’s even late by a few minutes – that sets off a really significant chain of events. Their precious 0% percent rate is taken away and they’re charged a penalty rate that might be 28% or more.
  • They get socked with a late fee on top of it, and their credit score could even be damaged. Having a lower credit score means your normal interest rate goes up, so you’re suddenly suffering a cycle of negative events just because your statement or payment didn’t get processed by the card issuer in a timely manner.

So even in the simple act of passing new laws regarding mailing statements sooner Congress has done a lot to protect cardholders from unfair practices.

Limiting Over-Limit Charges

Americans pay in the neighborhood $15 billion in annual credit card penalties, so our punishment equals fat profits for card companies. Before the Credit Card Act was passed you could inadvertently incur lots of overpayment penalties – without realizing it. But an important new guideline put a stop to the card company practice of letting you overcharge on your card and go over your established and stated credit limit.

  • If you used your plastic to buy a beer for $3, for example, but that purchase exceeded your limit you could get charged up to $35 dollars in penalties for that one transaction.
  • What if you left your house with your card already maxed-out and stopped for a burger – paying for it with plastic. Then you went to an ice cream parlor and paid for a double scoop with the same card, before using the card to buy one beer at one bar and another beer at another bar. You gas up the car on the way back home and then buy groceries – using the card two more times.
  • That’s six separate transactions. Maybe the burger, ice cream, and beers added up to a grand total of $20 and you spent another $30 on gasoline and groceries. You spent $50 during your outing. But the six over-limit fees cost you $35 each. So what you thought was a $50 outing winds up costing $210 in fees alone.

What would happen now, in the post-CARD Act era, under the same scenario? You’d hand a clerk or bartender your maxed-out plastic and they’d swipe the card but your transaction would not be approved. That might be inconvenient and even a little embarrassing – but it would not cost you a dime.

Safeguards for Minors

You also have to be given 45 days notice before a bank raises your interest rate, and in most situations your rate cannot be hiked within the first 12 months of card membership. Another interesting rule is that if you are under age 22 a card company cannot issue plastic to you until they can verify that you have enough income to manage it without help from someone else like a parent or cosigner.

Other Miscellaneous Provisions

There are many other rules included in the Credit Card Act, and some of them are more applicable and relevant to you than others. I think it’s a good idea to become as familiar as you can with the entire legislation, and you can read a rather comprehensive summary of it within about a half an hour. That’s time well spent to enhance your consumer awareness.

To read an entire summary of the CARD Act go to the government’s website where you’ll find a full downloadable explanation of the landmark legislation.

Where Do We Go from Here

The newly created Consumer Financial Protection Bureau, tasked with guarding consumers from unfair and illegal lending practices, will play an integral role in enforcing the Credit Card Act. Many in Congress who have ties to the banking industry opposed its creation, however, so it remains to be seen whether the agency will be proactively empowered or politically hindered. As long as it is given room to operate – plus judicial support for tough civil and criminal law enforcement – it should be a fierce defender of your consumer and cardholder rights.

We still need to reform the way that credit card terms and conditions are written, because they are virtually impossible to decipher and understand. The more we can simplify those rules, the less it will be necessary to have federal regulators pass other rules to force card companies to be more transparent. A lot more needs to be done about promoting financial literacy, too. I personally think that this education should begin at an early age and continue through college. I believe, for instance, that a passing grade in a financial literacy class should be mandatory for high school graduation.

The Buck Stops with You

But the biggest problem with credit card misuse is that cardholders treat credit cards like free cash, when actually a credit card is just a license to go into debt. So the biggest responsibility is with consumers.

  • We all need to readjust our thinking and replace bad financial habits with healthier ones. As always, it is up to consumers to look out for their own best interests. That begins with a commitment to lifelong education regarding the positive and negative uses of revolving credit.
  • Credit cards are a wonderfully convenient financial resource, as long as they are used wisely and responsibly. But experience has taught the entire nation that debt can be dangerous, and contributing to savings is essential to financial stability.

I love my plastic. For me it is a useful tool for managing my money, keeping my credit score high, and actually increasing my savings over time through cash-back and rewards programs. But I also maintain a healthy respect for the power of plastic to do harm if I forget what it stands for and start using it recklessly.

If you think about it, that kind of increased and vigilant awareness of what credit cards genuinely represent is really the guiding principle behind the Credit Card Act. In my experience it is the spirit of the law that is actually more important than the law itself, so the CARD Act is really about giving cardholders a fair chance to take charge of their own financial destinies.

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