As if home foreclosures, a rising unemployment rate, and plummeting retirement savings aren’t enough to give us heartburn, the economic recession has pushed many Americans deeper into credit card debt. Though most of the blame lies with individual consumers—after all, no one forced us into an overspending frenzy; we did it ourselves—certain dubious practices by credit card companies have exacerbated the problem, and as a result, prompted legislative action by Congress.
CARD Act Takes Aim at Deceptive Practices
On May 22, 2009, President Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. The legislation is intended to eliminate excessive fees, penalties, and predatory lending practices.
Fairness in Fees. In the past, creditors reserved the freedom to shorten payment cycles at their discretion, which could result in late payments and stiff late fees for consumers. The CARD Act requires a monthly payment cycle of at least 21 days.
It also bans the practice of calculating interest charges on a previous month’s higher balance, requires companies to apply payments to higher interest balances first, and minimizes over-limit fees by requiring that consumers be notified before being allowed to go over their credit limit and trigger costly over-limit fees.
Crystal Clear Disclosures for the Customer. The new rules are designed to help reduce confusion regarding credit card rates and fees. Credit card terms must be clearly visible and legible to the consumer and disclosed in language that is easy to read and understand.
The new rules require creditors to provide crystal clear statements of account activity once a card is in use, so consumers can easily see new charges and fees. Creditors are also required to show the financial consequences of paying less than the full balance due over a period of time. The goal is to educate consumers and encourage responsible use of credit.
Accountability Rather Than Secrecy. Going forward, credit card companies must publish their contracts in a public place and in plain language. Companies that do not adhere to these new regulations can be fined. Credit card regulators will continuously monitor credit card practices and introduce additional safeguards as needed.
Advance Notice and Opt Out Options. Credit card companies no longer will have the option to raise rates on a whim. Rather, they will be required to provide a notice of change in terms a full 45 days in advance. As a card holder, you will have the option to opt out of a new, higher rate and can repay your debt at your current rate. However, by opting out, your card will be cancelled and you will no longer be able to use it.
There are some exceptions to the opt-out rule worthy of note. Consumers cannot reject a higher rate if it results from a change in the prime rate (if a variable rate is attached to their card) or if they are more than 60 days late in making payments.
More Regulations Planned. More changes will be rolled out in the coming months aimed at keeping a lid on interest rates, preventing card companies from targeting young adults, and even regulating interest assessed on gift cards. Credit card issuers will be hammered with new requirements to protect consumers and ensure fair business practices.
Limit Your Debt. The changes to credit card rules will ultimately make the use of credit a more expensive proposition. Credit cards are convenient tools for purchasing plane tickets, reserving hotel rooms, and renting a car, so it’s difficult to eliminate them from our lives altogether.
The key is to pay your bill in full each month or as soon as possible. As soon as you carry a balance, your debt will grow rapidly under the weight of hefty interest rates assessed by most card companies. If you’re struggling under the burden of credit card debt, talk to a credit counselor or trusted financial advisor about your options. The sooner you can repay what you owe, the better.
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This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.
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