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Ask the Expert—
New Credit Card Rules effective Feb. 22, 2010

Ruth Gaon, CEO

Q:  I thought that the Credit Card Act of 2009 was implemented back on August 20, 2009.  Is this another Act?

A:  No, the Credit Card Act of 2009 has several different implementation dates that are tied to different requirements for credit card issuers.  The second of three implementation dates is today, February 22, and requires various changes that will impact credit card holders.  The changes taking effect can be grouped into three broad areas:  1.  What your credit card company is required to tell you  2.  New rules regarding rates, fee, and limits  3.  Changes to billing and payments  (see the Federal Reserve’s “What You Need to Know: New Credit Card Rules”  at  http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm )

Q:  Let’s start with what the credit card companies have to tell credit card holders.  I know that card holders are concerned about interest rates increasing.  Is there a change in this area?
 
A:  Yes.  Credit card companies must send the card holder a notice 45 days before they can:

• increase their interest rate
• change certain fees (such as annual fees, cash advance fees, and late fees) that apply to their account
• make other significant changes to the terms of their card

If their credit card company is going to make changes to the terms of their card, it must give them the option to cancel the card before certain fee increases take effect. If they take that option, however, their credit card company may close their account and increase their monthly payment, subject to certain limitations.
For example, the credit card issuer can require them to pay the balance off in five years, or they can double the percentage of their balance used to calculate their minimum payment (which will result in faster repayment than under the terms of their account).
The company does not have to send them a 45-day advance notice if

• they have a variable interest rate tied to an index; if the index goes up, the company does not have to provide notice before their rate goes up
• their introductory rate expires and reverts to the previously disclosed "go-to" rate
• their rate increases because they are in a workout agreement and they haven’t made their payments as agreed

Q:  In the past, card holders have had the option to just make minimum payments.  Will they still be allowed to do that?

A:  Yes.  But the difference now will be that their monthly bill will include information on how long it will take them to pay off their balance if they only make minimum payments. It will also tell them how much they would need to pay each month in order to pay off their balance in three years. For example, suppose they owe $3,000 and their interest rate is 14.4%--their bill might look like this:
 

Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 late fee and your APRs may be increased up to the Penalty APR of 28.99%.
Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:

Q:  What about the new rules regarding rates, fees and limits?  Will credit card companies be allowed to increase interest rates at anytime?

A: There can be no interest rate increase for the first 12 months after an account is opened.  There are some exceptions:

• If their card has a variable interest rate tied to an index, their rate can go up whenever the index goes up
• If there is an introductory rate, it must be in place for at least 6 months; after that their rate can revert to the "go-to" rate the company disclosed when they got the card
• If they are more than 60 days late in paying their bill, their rate can go up
• If they are in a workout agreement and they don't make their payments as agreed, their rate can go up

Q:  What about the practice of increasing rates based upon the card holder’s payment record with unrelated accounts, such as utilities or other credit cards?  Will the card issuers still be able to look at that for justification for a rate increase?

A:  No.  This practice is referred to as “Universal Default” and is banned under the new rules.

Q:  If, for some reason, the interest rate does increase, does it apply to the entire balance of the card as well as new charges?

A:  No.  Increased rates apply only to new charges. If their credit card company does raise their interest rate after the first year, the new rate will apply only to new charges they make. If they have a balance, their old interest rate will apply to that balance.

Q:  Sometimes card holders are not aware of how close they are to their credit limit and make a purchase that takes them over their limit but are then charged a fee for going over their limit.  Will an over-the-limit fee still be allowed?

A:  The answer is yes, but only if the card holder tells their credit card company that they want it to allow transactions that will take them over their credit limit. Otherwise, if a transaction would take them over their limit, it may be turned down. If they do not opt-in to over-the-limit transactions and their credit card company allows one to go through, it cannot charge them an over-the-limit fee.

• If they opt-in to allowing transactions that take them over their credit limit, their credit card company can impose only one fee per billing cycle. They can revoke their opt-in at any time.

Q:  Some credit card companies have (or are thinking about resurrecting) annual fees or application fees.  Will the amount that the credit card issuer can charge for these fees be limited?

A:  Yes, those fees cannot total more than 25% of the initial credit limit. For example, if your initial credit limit is $500, the fees for the first year cannot be more than $125. This limit does not apply to penalty fees, such as penalties for late payments.

Q:  What about age limits on applying for credit cards.  Is there a limit?

A:  Yes.  If the applicant is under 21, they will need to show that they are able to make payments, or they will need a cosigner, in order to open a credit card account.  Also, if they are under age 21 and have a card with a cosigner and want an increase in their credit limit, their cosigner must agree in writing to the increase.

Q:   In the past, credit card holders have had issues with receiving their bills just a few days before their due date and also sometimes having a due date fall on a weekend making their payment late if they tried to pay on the due date.  Will these practices be prohibited now?

A:  Yes.  The credit card company must mail or deliver the card holder’s credit card bill at least 21 days before their payment is due. In addition

• Their due date should be the same date each month (for example, their payment is always due on the 15th or always due on the last day of the month).
• The payment cut-off time cannot be earlier than 5 p.m. on the due date.
• If their payment due date is on a weekend or holiday (when the company does not process payments), they will have until the following business day to pay. (For example, if the due date is Sunday the 15th, their payment will be on time if it is received by Monday the 16th before 5 p.m.)

Q:  Credit card companies have been known to apply any excess payment amount to the lowest interest balance, leaving the balances with higher interest rates alone.  Will this practice change with the new rules?

A:  Yes.  Payments must be directed to highest interest balances first.  If a card holder makes more than the minimum payment on their credit card bill, their credit card company must apply the excess amount to the balance with the highest interest rate. There is an exception:

• If the card holder made a purchase under a deferred interest plan (for example, "no interest if paid in full by March, 2012"), the credit card company may let them choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, the credit card company must apply their entire payment to the deferred interest-rate balance first.

Q:  Some credit card companies have used “two-cycle” or “double-cycle” billing.  What is this and can they continue to use this practice?

A:  Double-cycle billing is when a credit card issuer imposes interest charges on balances calculated from both a prior billing cycle and the current billing cycle.  As of  February 22, 2010, credit card companies can only use the current billing cycle.

Q:  Charging an additional fee for certain methods of payment is something that is being done in the industry—otherwise known as “Pay to Pay.”  Will this be allowed going forward?

A:  Credit card holders will no longer have to “pay to pay.”  Credit card issuers may not charge card holders additional fees to pay their bills by mail, electronic transfer, telephone or other methods, unless the card holder requests expedited payment (such as a last minute payment to avoid late fees).

Q:  As we have talked about, there have been Credit Card Act changes that were implemented in August 2009 and now we have these changes taking effect as of February 22, 2010.  Are there more rules to be implemented?