Consumers Can Expect Major Changes to Credit Cards in 2010
February 02, 2010
In May 2009, President Obama signed a groundbreaking piece of legislation placing strict new restrictions on credit card issuers. Known on Capitol Hill as the Credit CARD Act of 2009, consumer advocates hailed the law's passage as a long overdue reality check for an overheated economy. However, banking industry analysts warned that ripple effects from the new rules could hurt the consumers they were designed to protect. With the law's strictest provisions taking effect in February 2010, consumers must prepare for major changes in how they use credit cards.
Most Credit Cards Feature New Payment Schedules
The Credit CARD Act requires all lenders to mail paper statements or to post electronic bills at least 21 days in advance of a payment's due date. In addition, cardholders can now submit a payment as late as 5 p.m. in the time zone of a designated payment processing center.
Banks that miss those deadlines may no longer impose penalties or change cardholder status due to delayed payments. Therefore, many credit card issuers adjusted their customers' due dates in late 2009. If you automate your bill payments, review your statement for its new payment date. Otherwise, you could risk sending payments out of sync with your new schedule.
Credit Cards Carry Fewer "Fee Traps"
The Credit CARD Act eliminates many industry practices that frustrated consumers, with rules that stipulate:
- Creditors cannot raise fixed interest rates on existing balances unless an account has reached the end of a promotional period or a cardholder has missed two consecutive minimum payments.
- Cards with variable interest rates must clearly state the indexes used to calculate finance charges. Any changes to the financing formula must be communicated to cardholders at least 45 days in advance.
- Credit card issuers can raise interest rates on future purchases, provided they offer at least 45 days' notice in writing, with clear terms and conditions.
- Cardholders can repair their own accounts by making six consecutive minimum payments and remaining below their cards' credit limits. Banks can no longer indefinitely raise finance charges on once-delinquent accounts.
White House officials told reporters that "fee traps" like these contributed to many of the country's economic dilemmas over the past few years. Lawmakers expressed hope that credit card reform could improve Americans' purchasing power instead of padding the balance sheets of major banks.
Prepare for More Declined Credit Card Charges
Beginning in 2010, consumers must opt-in to over-limit authorizations and fees. Although lawmakers intended this measure to prevent cardholders from racking up service charges, the new rule could have a significant side effect. Cards near their credit limits are more likely to be rejected at the cash register, causing embarrassment and confusion. Even cardholders who micromanage their accounts may be surprised when an unexpected reduction in credit causes a cashier to ask for another form of payment.
Americans Will Hunt for High Credit Limits and Low Interest
To meet federal requirements for capital reserves, banks restricted credit lines and implemented higher minimum payments. While both moves help borrowers pay back their balances more quickly, some cardholders have already watched their credit scores decline due to higher utilization ratios (the percentage of available credit being used). More cautious lending practices and tighter income verification programs will make it harder for many Americans to qualify for high credit limits.
Likewise, caps on service fees have already caused some credit card issuers to raise interest rates. Intense competition among banks for new accounts has given way to more measured customer acquisition programs. "Pre-qualified" low interest credit card offers all but disappeared from mailboxes in 2009. Instead of offering the lowest rates, many credit card issuers hope to differentiate themselves through exclusive account features and affinity programs.Best balance transfer credit cards 2012, once offered at no charge, now carry processing fees of up to 5%.
Cash Back and Rewards Credit Cards Could Cost More
For years, credit card issuers have funded special perks for their most loyal customers by amortizing finance charges across their entire portfolios. With stricter guidelines tightening fees and restricting interest charges, many card issuers now rely on merchant processing service fees to pay for cash back rebates and frequent flyer miles.
Unwilling to tolerate higher transaction fees, large companies have encouraged customers to pay with PIN-based debit cards that cost less to process. Some small businesses have stopped taking credit cards altogether, forcing customers to rethink their spending patterns. Industry experts predict that credit card issuers will continue to raise annual fees and redemption charges on reward cards rather than further alienate their acceptance partners.
Younger Credit Card Holders May Require Extra Help
By the late 1990s, college students routinely traded personal information for t-shirts, frisbees, and travel vouchers at campus credit card application kiosks. The Credit CARD Act eliminates many familiar college marketing initiatives and student prescreening programs. In fact, before issuing student credit cards to someone under the age of 21, lenders must either:
- verify that the student earns enough income to pay off their entire debt load, or
- receive an application bearing the name of an adult co-signer willing to pay the credit card's balance if the student defaults.
Restricting credit cards to consumers above the age of 21 may seem like a sound strategy to discourage reckless spending on campus. However, parents and grandparents of college students have come to rely on credit cards as a method of monitoring expenses and minimizing the risk of carrying cash. Therefore, families can expect more discussions about daily spending well into a student's college career instead of trailing off after their eighteenth birthday.
Developing New Credit Card Strategies in 2010 and Beyond
For many Americans, the full implementation of the Credit CARD Act will force us to consider the real value of the cards in our wallets. Brand loyalty may have to give way to new products that provide lower actual costs and better benefits, and more research will be required of consumers to identify the best credit cards 2012. "Surfing" balances from card to card will be replaced, in most households, by real commitments to paying down debt. Banks have already braced themselves for tighter profits from credit cards in 2010. Now, American consumers must prepare to change their financial habits to fit the new rules of unsecured borrowing.