New Credit Card Law – Helps or Hurts?
With the passage of the new Credit Card Accountability Responsibility and Disclosure Act of 2009 also known as the Credit Cardholders’ Bill of Rights Act of 2009, the Obama administration is being hailed as the savior of the little guy. President Obama wants to ensure that people use cards wisely and the card holders behave in a responsible way. From an MSNBC article:
The president noted that nearly half of all Americans carry a balance on their credit cards, and that their average balance is more than $7,000.
“So we’re not going to give people a free pass, and we expect consumers to live within their means and pay what they owe,” Obama said. “But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives.
So the average balance being carried is $7,000? That doesn’t sound like people are living within their means. If they were, the balance would be a lot closer to $0. Let’s look at some of the new changes and evaluate their impact on the average family.
- Limited interest rate hikes – Increases in your interest rate can only occur on new balances after one year. Also, existing balances aren’t subject to rate increases except in the case of promotional or introductory rate expiration or the holder misses a payment.
- More time to pay monthly bills – Credit card companies will have to provide at least 21 days from the date the bill is mailed before the payment is due. In addition, they can no longer have payment due on holidays or weekends.
- Highest interest balances paid first – Usually, cash advances taken on the card carry a larger interest rate than a normal purchase. Now, any amount received over the minimum payment, will have to be applied to the balance with the highest interest rate.
- Limits on over-limit fees – Credit cards have spending limits attached to them. So what happens if you try to buy something that would cause you to exceed the credit limit? Depends on your card. Some cards would simply be declined, others would allow you to purchase the item, but you would be charged an over-the-limit fee. Now, card holders will have to ‘opt-in’ to over-the-limit fees. If the card holder declines to ‘opt-in’, then the card purchase will be declined.
- No more double-cycle billing and lower subprime fees – Finance charges will only be calculated based on the purchases made during the current billing cycle and not the previous. This will help those that don’t carry a balance on their credit cards. For people getting a subprime credit card, the ‘origination’ fees are limited to 25% of the account balance.
- Minimum payments – Most people know that by paying minimum payments it will take years to pay off the entire balance. Now the credit card companies will have to disclose the consequences of making only minimum payments. They will also have to detail the amount card holders need to pay, if they want to pay off the balance in 12, 24 and 36 months.
As long as credit card companies are allowed to charge interest on unpaid balances, which they should be allowed to do, there will be people who will get in trouble using credit cards. The only way to prevent credit card abuse is to not give credit cards to people that shouldn’t have them. The real big change in this law is the removal of the Universal Default clause, and that appears to be offset with new fees that will still be passed down to the consumer. The proposed changes won’t force card holders to use their cards wiser, but it will force the card companies to introduce new fees, that will flow down to all users, simply to implement all the changes.
The moral of this story? When the government claims that it is going to help, you might want to decline the offer.
Related Websites - New Credit Card Rules For U.S. Consumers in Credit Card Lending Overhaul of (CARD) Act
- The Start Digging Out Of Credit Card Debt Challenge - Week Six.
- Negotiate with Credit Card Companies
- Common financial mistakes series, part three
- Common Credit Card Mistakes
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