New law may help you get out of debt
Congress recently passed the Credit Card Accountability, Responsibility and Disclosure, or Credit CARD, Act of 2009. The law goes into effect Feb. 22, but many pieces of the legislation have other effective dates.
For Americans who carry a balance, which is about 40 percent of people who use a credit card, some of the protections will be welcome news.
The bill does away with a prevalent credit card practice called the Universal Default Clause. This practice allowed credit card companies to increase interest rates to consumers based on credit report activity on other debt held by the consumer. When this part of the law goes into effect, August 2010, your credit card issuer will be able to raise your interest rate only if the account in question is past due by 60 days or more.
Once you get the account back on track and make six timely payments, your interest rate must go back to the lower normal rate for your account. There are some nuances, including rules about promotional rates and new debt, so do read all updates and inserts sent to you by your credit card company.
Other features of the new legislation include a requirement of advance notice of rate increases of 45 days compared to the current notice timeline of only 15 days. Over limit fees will be restricted to only once per billing cycle and only if the cardholder chooses to allow the creditor to approve an over-the-limit transaction.
An egregious previous practice of some credit card companies was a sub-prime credit card with a small credit limit of $300 to $500 that had a short window for payment with high late and over-the-limit fees. Consumers with these types of credit lines often quickly found themselves past due and over the limit,
which basically caused them to use up the card limit with numerous late fees. When the new law goes into effect, late and over-the-limit fees can never exceed 25 percent of the initial credit limit.
Another feature of the new law will restrict credit card approval rates to people 18- to 21-years-old. In the past, this age group has been solicited with small credit card limits and high interest rates. For some young people who are just getting a foothold in the financial decision-making world, the predatory tactics of these cards caused great heartache and difficulty. Now people in this age group will need to prove adequate stable income to support credit card debt repayment or have a co-signer.
Interest billing on credit balances soon will be restricted to only the interest accrued on balances from the current month, and all payments must pay the highest interest rate balances first if there are several different rate structures (special offer rates) on the same account. Gift cards will not expire for five years, and inactivity fees won't occur until the card has not been used for 12 months.
Consumers will get more time to pay with a required 21-day window from the statement date until the payment is due.
There also are some valid concerns that credit card users who do indeed pay off their balances each month will see some of their credit card benefits decrease. This unintended consequence will be watched closely as the new law takes effect. It will be interesting to see how the credit card industry restructures its pricing structure and if there will be a backlash from consumers who do not carry a balance from month to month.
It is hoped that the industry finds a fair way to reasonably charge for its services so that consumer personal responsibility is rewarded for all credit card users.
Finally, if you are concerned about paying off credit card debt and feel that you never make progress on reducing the amount you owe, the nonprofit Consumer Credit Counseling Service of Northern Colorado offers a debt management program to give structured repayment options so that credit card balances can be paid off over time.
After a recent "Call to Action" by the National Foundation for Credit Counseling to the credit card industry, 10 of the largest national credit grantors have agreed to further lower interest rates to allow consumers a better opportunity to create a plan to pay off all unsecured debt and avoid bankruptcy.
Sara Allen Gilbert is executive director of the local Consumer Credit Counseling Service, 1247 Riverside Ave., Fort Collins. Call her at 229-0695.