In February 2010, many new regulations, all directed at protecting credit card users, went into action.
Raising interest rates and exacting fees from customers (among other practices) can make up an enormous amount of a bank's profit, but also hurt consumers. In fact, U.S. banks charged customers more than $38.5 billion in over-the-limit fees for debit and credit cards last year, a record. The banks called these fees a service to their customers, saving them the embarrassment of having their card denied. Consumer advocacy groups call it abusive behavior aimed at the most vulnerable.
With the introduction of the Credit Card Accountability, Responsibility, and Disclosure Act, Washington has listened and put some strict guidelines in place to help protect consumers. These new rules will also hurt the profitability of credit cards for banks.
Many banks are using loopholes to make up for lost income that consumers need to know about. In fact, in the months leading up to these new rules, many went ahead and raised everyone's interest rate and fees, sometimes with no real reason, in anticipation of the new restrictions.
1) More Time to Pay. You may have noticed there's a little more cushion when it comes to paying your bills on time. Since last August, card companies have been required to send billing statements at least 21 days before the payment is due. In addition, banks were required to standardize their payment dates. Now, your due date will always occur on the same day of the month (no earlier than 5 p.m. -- another change), and if the payment due date falls on the weekend or a holiday (when banks don't process payments), you will have until the following business day to make your payment.
2) Advance Notice of Rate Hikes. Another change that took effect in August, card companies must alert consumers 45 days in advance before they can increase their interest rates, change fees applying to the account, or make other significant changes to the terms of the card. Prior to the change, companies only had to give cardholders a 15-day heads up.
However, there are other aspects of a credit card that this rule doesn't apply to, like credit limit changes. If your credit card company decreases your credit limit, they are NOT required to notify you, unless the change would trigger a penalty, like an over-limit fee. So you still need to read any correspondence your bank sends you. The new rules also fail to cap interest rates.
The main reason this rule was put in place was to give credit card customers the chance to cancel their card (in advance) if they don't like the changes. But keep in mind that canceling cards can hurt your credit rating.
3) No More Retroactive Rate Increases. If your amarket value still does increase, it will only apply to charges made after the change. Any previous balance will only be subject to the previous interest rate. And any time you pay more than your monthly minimum, the excess will go towards paying off the balance with the highest interest rate.
Under this law, issuers can't raise rates on existing balances during the first year unless a prior promotional rate expired, the index on a variable index rate increased, or you were 60 days late in paying your bill. If your rate rises because of a late payment, the bank is required to restore it to its lower rate once you've made six consecutive monthly payments, on time of course.
In the past, if you missed a payment on another card, for instance, credit card companies could raise your interest rates, even if the accounts weren't related. This practice, also called "universal default," has also been banned.
4) Real Overdraft Protection. Under the new law, credit card holders are automatically "opted-out" of overdraft protection. For some people, this is a major win. Rather than force customers to allow the bank to charge them for accidental overages, the bank must get their approval. Customers that choose to stay "opted-out" may have their card denied if they try to make a purchase that exceeds its limit, but they also won't have to worry about being charged a fee.
A few major banks, including Chase and Bank of America, have started aggressive campaigns aimed at convincing debit-card users to "opt-in" to overdraft protection. Some are warning customers that without their "protection," they'll be left out in the open, unable to use their cards "even in an emergency."
But these warnings are mainly scare tactics. What it comes down to is this: If you don't want to risk overdraft fees, and don't mind your card being declined, then don't opt-in. But if you don't want to take the risk of being stuck in an emergency without access to your debit card, then sign-up for one of the many free services banks offer to keep their customers informed on their account status. If requested, for example, Bank of America will send daily e-mails updating customers on their balance, and even call if your balance slips below a certain level. Neither service costs a dime.
5) High-Fee Caps. If your credit card company requires you to pay fees (like an annual fee or application fee), they can't total more than 25% of your initial credit limit. So if your initial credit limit is $500, the fees during the fmitt year can't be more than $125. Remember, the "25% total" rule only applies to non-penalty fees.
One example of how banks are coping with this change is charging large fees for "foreign transactions." However, this may not apply strictly to making purchases overseas, as these fees could be applied for simply using your card to buy something from an overseas merchant. Not all credit cards carry such fees, but if you're not sure, you should find out before making any foreign transactions.
6) Protection for Young Savers (and Spenders). This new rule helps prevent banks from preying on students unaware of the trouble debt can bring them. If you're under 21 and can't prove that you have an independent means of income or provide an older co-signer, you can't open credit card. This rule couldn't have come sooner: A recent study from Sallie Mae reported that, last year, college students carried an average balance of $3,173 on their credit cards -- a record high since the first study in 1998.
7) Balance Awareness. Don't be surprised if your next statement looks a little different! Now your monthly credit card bill will include easy-to-understand information on how long it will take you to pay off your balance if you only make minimum payments. It will also break down how much you would need to pay each month to pay the balance off in three years, as well as how much you'd save in interest payments. These changes are meant to help consumers understand their credit card bills and how paying more on their balance each month save on the cost of using a credit card.