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Credit Card Reform: The 5 Biggest Changes

March 30, 2010

By Barbara Marquand | Money Rates Columnist

A host of new credit card regulations have gone into effect, and more are to come, thanks to the Credit Card Accountability Responsibility and Disclosure Act (commonly known as the Credit CARD Act), signed into law in May 2009.

Here's a look at the biggest changes that may affect you:

1. Credit Card Rates

Credit card issuers can't boost the interest rate on your existing balance unless you're 60 days late on payments, and they can't increase the rate on new purchases during the first year of an account. Later, they must give you 45 days notice for rate hikes and a chance to opt out of the account if you don't like the new terms.

Beware that your rate can still fluctuate if your credit card has a variable interest rate, which consists of a margin plus an index, such as the prime rate. The new rules on interest rates apply to the margin credit card companies charge--your rate could still go up if the index rises.

2. Credit Card Fee and Penalty Limits

Credit card companies must get your permission to charge you over-limit fees for the privilege of exceeding your credit limit.

The new law also limits annual fees to no more than 25% of the first year's credit limit--a rule targeted at subprime credit cards, which commonly carried fees totaling well over half of the credit limit of a few hundred dollars.

A new rule will go into effect in August 2010 limiting penalties. That rule will ban inactivity fees for not using your card and limit late fees and other penalties to no more than the dollar amount of your mistake. In other words, the credit card issuer can't charge you a $39 late fee if you're late on a $15 bill.

3. More Credit Card Disclosure

Your credit card statement now shows how much credit really costs you. Credit card companies must tell you each month how long it would take to pay off the balance if you paid only the minimum due, and how much you'd have to pay monthly to eliminate your balance in three years.

4. Fairer Credit Card Billing

A practice called double-cycle billing--going back to a previous billing period to determine the current interest rate--is banned. In addition, credit card companies must apply your monthly payment over the minimum due to the balance with the highest interest rate first. Cash-advance balances typically carry a higher interest rate than purchase balances. Before the new rules, credit card companies maximized profits by applying payments to the purchase balance, allowing the cash-advance balance to accrue additional finance charges. Finally, your card issuer must give you a 21-day grace period after mailing the statement.

5. No More Marketing to College Kids

Young people under 21 can't get credit cards unless they have a sustainable income or they get an adult to co-sign. Credit card companies are prohibited from marketing on campus and giving out freebies to students for filling out credit card applications.

The new rules provide protection, but as before, shop carefully. Read the fine print before signing up for a new credit card.

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