Two of these practices – retroactive rate increases and “hair-trigger” penalty interest rates – were costing U.S. consumers a minimum of $10 billion per year, according to research from the Pew Safe Credit Cards Project.
The Feb. 22 provisions are the second phase of the law. The first part took effect last summer. The third and final stage will be enacted in August when the Federal Reserve issues its rules on “reasonable and proportional” penalty fees and charges.
Here's a list of major changes the CARD Act brings:
- Prohibits unfair rate increases. Banks may only change your interest if you are 60 days or more late on your monthly minimum payment. In addition, if you make six months of on-time payments, banks must restore your original rate.
- Bans universal default. One of the most controversial credit card trends of the last decade, among other things, "universal default" clauses allowed banks to impose penalty rates and fees whenever a third-party credit bureau reported a default with another lender.
- Restricts over-the-limit fees. These fees are banned and transactions won't be approved if you're over your limit. However, you can opt-in or; consumers must agree to them.
- Requires fair payment allocation. Credit card providers can impose interest charges only on balances in the current billing cycle, eliminating a practice known as "double billing," which generally affects individuals who pay off their balance every month. They also cannot allocate payments in order to maximize the interest a consumer must pay.
- Requires a co-signer for most consumers under 21 years old. Any changes to credit limits or other terms on student credit card accounts must be approved by both the cardholder and the co-signer.
- Requires information be provided about financial consequences. Banks must now calculate how long customers could stay in debt by paying only minimum payments. They must also provide the payment amount necessary to meet a 36-month payoff goal.
- Requires use of plain language. New regulations mandate the size and typefaces used on credit card applications, statements, and account notices. Instead of "mice type" legal text printed along the sides or bottoms of account materials, banks must now use clear, readable language to explain products and services.
While the new law helps consumers significantly, it hasn’t done away with credit card problems. The industry has responded by developing new abusive practices, says Consumer Reports in its Money Blog article called "Beware New Credit Card Abuses, Even After Law Takes Effect Feb. 22."
Be sure to read the fine print in any letters you receive from your credit card issuer, and look out for changes such as these:
- Inactivity fees. If you don't use an account for a year, your issuer may begin charging you $3 a month until you do.
- International transaction fees. Not only are they increasing but issuers have expanded the definition of what they apply to, including items bought online in U.S. dollars from companies in other countries.
- Balance-transfer and cash-advance fees. Minimum fees for these activities are increasing while maximum fee "ceilings" are disappearing. Both fees are also more common.
The Pew researchers urge the Federal Reserve to take strong steps in developing its phase three rules, including the following:
- Restrain the size of penalties relative to the amount past due.
- Limit how high penalty interest rates can climb and how long they can apply.
- Stop “hair trigger” late fees and eliminate overlimit fees entirely.