How will the new credit card rules affect consumers?

By Xin Lu. Last updated 22 June 2009. 28 comments

Today a new bill was passed by the U.S. Senate with the intent of restricting abusive practices in the credit card industry.  A House bill was passed on May 12th and will be reconciled with the Senate version and President Obama hopes to sign it before Memorial Day.  So what does this bill contain and what does it mean for consumers?

First of all here is a summary  of the new rules:

  • Credit card companies will be required to mail a bill 21 days before it is due.
  •  Universal default will no longer be allowed.  This means that borrowers who are late or default on one card would not have their rates raised by another lender as long as the second lender is being paid on time.
  • Rates may not be raised on borrowers until they are 60 days past due.  As long as the borrower becomes current and pays on time for 6 months after they were delinquent the rates have to be lowered to its original amount.
  •  Extra fees for paying over the phone or online will be disallowed.
  •  If you have more than one card with a company, your payments must be applied to the card with the highest interest rate first.
  •  Issuers have to notify customers of rate changes 45 days before the change.
  •  Late fees cannot be assessed if the issuer delayed crediting the payment.
  •  Rates cannot be increased in the first year and promotional rates have to last at least six months.
  •  Penalty fees for going over the credit limit is disallowed unless the cardholder agrees to it.  If the cardholder does not agree to transactions over the limit then the transaction would be rejected.
  • Issuers must disclose the time and total interest costs it would take for consumers to pay off a balance if only minimum payments are made.
  • Gift cards must keep their full balance for at least five years.
  • Consumers under the age of 21 must have a co-signer who is willing to take on the responsibility of the debt unless they can prove they have the ability to pay.  Most likely a parent has to co-sign.  Additionally limit increases must be approved by the parent. 

Finally, a completely unrelated amendment that is going into this bill is that you are now allowed to carry guns in national parks and wildlife refuges again.  I am not quite sure that is in a credit card bill.

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What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

I think most of these changes are good since they are designed to stop consumers from falling into costly traps such as a $35 charge for being $2 over limit. Additionally, notifying a consumer how long it would take to pay off his or her debt is a good reminder as to how expensive credit can be and that notice with every statement may encourage people to pay more than the minimum.  I think the item that allows a delinquent borrower to keep the same rate as before is a bit questionable because it could give people the impression that there is no consequences  if they skip a payment or two.  If a borrower becomes deliquent there is a higher chance that he or she would default, and so it makes sense to raise the rates to offset the risk.  Another rule that I find somewhat detrimental and restrictive is that young people up to the age of 21 have to get a cosigner.  This  may prevent many responsible young adults from building up a credit history if they do not have a person who is willing to cosign.

Credit card companies generally do not make much money off borrowers who default completely, and the best customers for them are those who pay the minimum balance on time.  Those who pay the entire balance on time and incur no interest or penalties are ironically known as "deadbeats" in the credit card industry.  I think the changes will definitely prompt credit card companies to be more strict in who they hand cards to.  This could mean that people with little  credit history or low credit scores will have a harder time getting a card and the interest rates may be higher than now, but that may encourage more people to save their cash to buy things.

One potentially negative effect that has been discussed in many media outlets is that credit card issuers may want to recoup their "losses" on deceptive practices from the card payers who pay their balances in full every month.  Reward programs may be cut, and the annual fee may return.  However, I think consumers with great credit and the discipline to pay in full every month will just abandon the cards that  try to squeeze more out of them.  After all, issuers still make money off these customers through transaction fees.  Even though the margin is smaller, these customers are better than those who default completely.  I do believe that reward programs may be less rewarding in the future, so it might be worthwhile to cash in those points while the rewards are still good.

These changes will not go in effect until early next year, and the credit industry is not too happy with them. Do you think that these rules are reasonable?  Have you dealt with any abuse from credit card companies?
 

 

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Guest's picture

I disagree with author on the point about delinquent borrowers being encouraged because it is for a short span (60) days that they get to ride without consequences. Illness or a temp. layoff could cause those but 2 months isn't too long to wait before punishing them. And the provision that the rates be dropped back to the original agreement is only fair if they do the extra work to catch up and maintain. I agree about the bill being unfair to people under 21. Perhaps a good compromise would be making their credit cards require a security deposit of 25 to 50% of the limit for the first year, as that would show some developing money management skills.

Guest's picture
Colin

I had a hospital charge $6500 (full amount) on my $5k limit card after we agreed to $350/month. This led to my card being overlimit, getting an overlimit fee, and late fee assessed for not paying the overlimit fee (despite putting in writing I was contesting the overlimit fee before I ever got the statement).

To my knowledge it has all been cleared, but the bullet on not being assessed an overlimit fee seems like it would have prevented this whole mess. I can live without the card, but getting the fees cleared was a nightmare.

It seems, though, that the limit should not be breechable. It only seems as a line in the sand to rip a fee out of the card holder.

Guest's picture
Andi

I'm 18, and I don't know anyone who is both willing to cosign (on a credit card or a student loan) and has good credit. This was a problem when I started college last year and couldn't obtain enough loans because I didn't have a worthy cosigner. I was forced to leave college after just one semester.

I recently obtained a credit card and have been using it responsibly to build credit so I can go back to school. If this law passes, then I will have to wait until I'm 22 to go to college because I won't be able to build credit until then.

This law will hurt students like me. Please, write to President Obama and ask him to amend the bill!

Guest's picture

I never like the idea of the government telling a private company how to conduct business. But with that said, many credit card companies have been taking advantage of their customers with unfair practices. Most of these new rules, including mailing the bill early, not raising rates on late day #1, not raising rates based on performance on other cards, notifying customers in advance of changing rates, disclosing payment amortization schedules, etc., are all common courtesy practices that the companies should have been doing from the beginning - then there would have been no need for the government to step in and take over the industry the way they're doing with everything else.

The one rule I completely disagree with is not allowing people under 21 to obtain credit - it's bordering on an infringement on civil rights. An 18 year old person is an adult by nearly all definitions - they shouldn't need to ask their parents for permission to get a credit card. This is government-sponsored age-discrimination, and should not be tolerated.

Guest's picture
Phedre

Although I see the point of those who drafted the age-restriction into the bill, it's not ethical. And it's basically a legal method of lengthening childhood. The majority of 18 year olds have parents who will provide some kind of financial advice, but have no interest in taking on debt should their adult-child not listen.

How many parents are willing, and more importantly, capable, of co-signing on a car? Will the credit cards still shaft the 18 year old with absurd rates, or will a parent's 750+ score get their kid a decent rate?

It's just going to force kids to wait even longer to build credit, thus being shafted into a position of waiting even longer to be eligible for better rates on car loans or their first mortgage.

Guest's picture
ctreit

I like this new law. Many people don't realize how expensive credit card debt is. At the same time, credit card companies pull all kinds of tricks on us. I remember that I went over the limit once and I was charged a fee. Fortunately I could argue well enough that the fee was taken off. What is the point of an "over the limit fee" anyway? I thought a limit was, well, a limit. Besides, if I can get over an established limit, at what point does a credit card company reject a charge? How do I know what that "real" limit is?

Guest's picture

I think these new rules are great. Unfortunately, in preparing for this to take affect, my credit card company recently raised my from 2.99% to 17.99% although I have never been late on payments with any of my bills. I called and the rep I spoke with says it was due to a check of our credit. I knew I had good credit, but just to be sure, checked anyway: our score is 760. So the only thing it could possibly be is that they are trying to make money before these rules take affect. And I've read that I am not the only one this has happened to.

Guest's picture
Patsy

I agree that these rules are needed. You are right about one thing. If, as one that pays her balance in full every month, I get zapped with an annual fee or interest charged from the moment of purchase, I will certainly ditch my card and find an alternative if one exists. I am sick of responsible behavior being punished and the label "deadbeat" applied to people who use their cards sensibly is just insulting.

Guest's picture
Fidget

I'm not a fan of the cosigner item. My husband purchased his first home at 20. He was able to do this since he had started building his credit at 18. There was no one who would have cosigned for him. I can see this being a impediment for responsible young adults.

Guest's picture
Guest

This is crazy. It is the credit card companies money to lend anyway they see fit. If you don't like it, you don't have to carry their card.

It is not their fault people lose their job (for some reason i don't think that is why most people are in serious debt). This is not a socialist state, people must be allowed to fail.

Basically, the government will control the lending rules, and the companies will pass the "non-savings" on to the responsible consumers, so we will all be in an equally crappy situation.

Guest's picture
Bethany

The co-signer rule is completely outrageous. I started building my credit at 18, completely independently. I don't know anyone who would have been willing to co-sign, and even if I had, everyone I know has lousy credit scores so I probably would have been rejected. At 22, I have a credit score in the high 700's and was able to buy a house last month. This wouldn't have been possible if this new law had been in effect when I was 18.

I don't understand why young adults between the ages of 18 and 21 are treated like children in this country.

Guest's picture
Marc

If you have poor credit where will you get money? The banks won't increase fees on people like me, if they did - I would drop the card, I have no balance. They will compensate for the increase risk by denying credit, they will not lose money. Then where will these people go? Pay day lenders? better get there before those are regulated out of business. Then where? Loan sharks?

This bill will NOT change peoples behavior, and the people who are in trouble now with credit cards will find themselves in trouble with much worse companies or criminals.

Guest's picture
Guest

People with poor credit have no business having credit cards or other loans. Hard to feel sorry for irresponsible folks. Why should the banks subsidize these people? Although the fees and interest rate charges of late are ridiculous and are robbery at best, last I knew, this is USofA and banks and other companies are in the business of making money. They are not in the business of "helping" people who can not afford credit, nor should they. Of course, with the new rules, those of us who have great credit and carry no balances will probaly have annual fees now imposed for the priveledge of carrying a credit card. We are being penalized.

Guest's picture
Guest

People with poor credit have
Submitted by Guest on May 20, 2009 - 11:55.

"People with poor credit have no business having credit cards or other loans. Hard to feel sorry for irresponsible folks. Why should the banks subsidize these people? Although the fees and interest rate charges of late are ridiculous and are robbery at best, last I knew, this is USofA and banks and other companies are in the business of making money. They are not in the business of "helping" people who can not afford credit, nor should they. Of course, with the new rules, those of us who have great credit and carry no balances will probaly have annual fees now imposed for the priveledge of carrying a credit card. We are being penalized."

I disagree with what you said. Some people have bad credit not by their choosing. My husband and I have had excellent credit but becuase of the way the ecomomy is and my husband having to have surgery on his knee our credit is going to go downhill real fast. So how can you say that you can not feel sorry for irresponsible folks. My husband will be laid-off from his job in a month and had to have surgery on his knee back in April. We had a savings account worth about 4 months income, but because of his knee and short term disability only giving us $200 a week we have gone through that already. Doctor bills are not cheap even when you have insurance. We are paying $30 a visit for physical therapy...he goes 4 time a week. So once he is laid-off we will only have my income and his unemployment to pay our bills and it will not be enough. So to say that we are irresponsible folks makes me mad. We have never missed a payment on any of our bills but because of things out of our control we probably will. I am sure that we are not the only ones out there like this. There are so many people that have lost their jobs...I am sure that they would rather be working paying their bills then getting phone calls everyother minute. So maybe you should think before you make comments.

Guest's picture
Kathryn

It's not accurate to say that this legislation requires anyone under the age of 21 to have a cosigner.

The actual text of the legislation places restrictions on persons between the ages of 18 and 21 ***who are full-time college students***.

For such individuals, credit card companies would not be able to extend uncosigned credit for more than $500 or 20% of the student's gross annual income, whichever is greater. A larger credit limit would require a cosigner (parent, legal guardian, or spouse), and any increase in the credit limit would require the cosigner's approval.

The total un-cosigned credit limit for FT students with some income cannot exceed 30% of annual income, and FT students with no verifiable income cannot get more than one un-cosigned credit card.

Guest's picture
Bethany

Thanks for the clarification Kathryn. That part of the law seems much more reasonable to me than I originally thought.

Guest's picture
Tabatha

I've worked for a major credit card company for 10 years and I've never heard anyone in the industry refer to people paying on time as deadbeats. I think that's an urban legend.

Guest's picture
Rosa

Andi and others - if you couldn't get enough federal Stafford loans to cover your college tuition, you should be agitating to get the Stafford loan laws changed, not the credit card ones. Credit cards are a terrible way to finance college and you definitely do not need a cosigner for a Stafford loan.

Guest's picture
Laura

Your payment now goes first to the balance with the HIGHEST interest rate.

Guest's picture
Denise

I hope this new legistation will help consumers become debt free.

Guest's picture
Karen

@Kathryn Thanks for the clarification. That does make more sense. I don't believe that a person's age (over 18) or status should determine credit worthiness, but without a history they are a risk. Co-signers? No, but higher rates or fees? Yes. Once a person is no longer an "unknown" decrease the rates or fees.

I can see where the term "deadbeat" may come from. Businesses are not charities. Why should it be considered acceptable to use their resources (money)to pay our expenses or fund our investments, take their "rewards", and not give anything? I understand that banks make money on other services and depositors, but if you only use the card and you're not a depositor or other client contributing to their income, then you are a "deadbeat".

If I want to use a card as a convenience to have all my bills/expenses tracked in one place, cover an emergency, not have to take money from my savings or other investments, take advantage of a time-limited opportunity, and only have one bill to pay a month, am I willing to pay a reasonable service charge for that convenience? Yes. Do I want to be raked over the coals by a bank? No.

Credit is not meant as a way to live a life, but simply a convenience. We are encouraged to save/invest for a reason. The situation has gotten WAY out of hand and banks are guilty of taking advantage of the situation. Unfortunate as it is, governmental intervention is one prong of the solution. Others have to come from a change in the consumer mentality.

Guest's picture
lizriz

These changes are awesome. Universal Default, don't let the door hit you on the way out.

Question: "If you have more than one card with a company, your payments must be applied to the card with the highest interest rate first."

More than one *card*? Or multiple balances on one account? Right now what they do is bury your higher interest rate balances behind lower interest balances on one card, and I would hope that the bill fixes *that*.

Finally, this which has been clarified in the comments to apply to full-time college students: "Consumers under the age of 21 must have a co-signer who is willing to take on the responsibility of the debt unless they can prove they have the ability to pay. Most likely a parent has to co-sign. Additionally limit increases must be approved by the parent."

I think that's a damn good thing.

Guest's picture
Guest

If I choose to use a card, and the bank offers to waive any finance charges when I pay my balance in full, they should not call me a deadbeat if I am wise enough to take advantage of their offer. They charge enough to the merchant through transaction fees to cover any costs, and they don't lose money by my paying off my balance each month.

Guest's picture
Basil

The under 21 rule is ridiculous.

Here's why:

I turned 21 last October and graduated from college last May. I've been living two states away from my family since the age of 17, and the first month of school (in Sept.) STRUGGLED to pay for anything/take care of bills online/pay school tuition because I couldn't open a bank account without my parents present. And, I moved without knowing anyone in IL, so I doubt I'd find some random person to cosign for me.

My family cosigned my student loans the first year, but would not cosign for any other years, which meant my interest rates were higher (less credit history). HOWEVER, because I built good credit, each year in school I was able to get loans for lower rates.

You're not helping college students by hindering their chances at increasing their credit scores.

I can understand limiting a student to one credit card, and requiring a cosigner for additional cards. Lots of people open up wayyy too many cards at once. I can also see why you would set a low credit limit, but I don't believe there should be a number that regulates it. You get a higher limit when you build better credit; that's how it works.

And if the gov't is concerned about people using cards poorly, make it mandatory in economics classes or something.

Guest's picture
chuck

@Karen:

No one forces the credit card companies to offer anything to the consumer. Why are you so sympathetic to their "plight"?

Besides, the transaction fees collected by the credit industry are not insubstantial. If memory serves they run 1 to 5 percent of the transaction in most cases - sometimes even more! This is off the top - before any interest is charged to the credit card user. The "deadbeats" are already paying that fee (it's passed on by the seller) just by using the card!

If the credit industry can't make their numbers work with the new rules they need to find a new line of business.

Linsey Knerl's picture

Good article, Xin.  I discussed this topic with caller on our radio show, and the consensus is that while it may be more difficult to get a large amount of credit at a young age, setting an age limit of 21 is a bit over the top.  Here's why:

Most states have a legal adult age of 18 or 19.  In Nebraska, they are trying to get that lowered to 18 FROM 19.  So, in theory, I can go out, get an apartment, auto insurance, and even a $40,000 college loan without my parent's help.  But not a $200 Target charge card?  You gotta be kidding me!

Another thought that was brought up was this --- it seems that there is an increased focus on fiscal responsibility as a "national" or "community" concern.  It is no longer acceptable to look at borrowers as individuals for some reason (which would negate the age argument completely.) Instead, we have made broad, generalized statements about credit worthiness that is often not related to ability to pay (age, self-employed vs. employed, etc.) What I find amusing (not really) is that we have now committed ourselves to a national debt of ginormous proportions, something that we will really need our young people to step up and pay in the future.  They will have all the responsibility of an older "credit worthy" working American: paying Soc Sec taxes, additional taxes, fees, and whatnot like everyone else.  We trust them to pay all of these things, because they are not given the choice.  But we don't trust them with a credit line without having an older generation co-sign.  Given the current state of affairs, it sems a bit harsh, and a wee hypocritcal, if you ask me.

Grab a responsible 20 year old and put him next to a responsible 21 year old.  Can you really tell me one is more "credit-worthy" than the other? 

Linsey Knerl

Guest's picture
Guest

No one without an income should be allowed to have a credit card, regardless of age. If you are 10 and have a job and can pay back the money, you should be allowed to have a credit card. I had a checking account at age 12 and a business by 15, never had a problem building credit without a credit card.

Guest's picture
Guest

That's not necessarily true. I built up a large amount of savings during my life and I use my credit card to buy just about everything; I just make sure I pay it off every month. I think that people with no income AND no savings shouldn't be allowed to have a credit card.

Now, I don't understand why this country treats everyone 18-20 like they are still irresponsible children. Also, I don't understand the hypocrisy of the laws. People 18-20 can operate multi-million-dollar military machinery, die for their country, get married, and yet they can't drink or be trusted with their own money.