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Six Things You Need to Know About Credit Card Reform


What the new regulations mean for you.

Say goodbye to rate hikes without warning, monthly changes to your billing cycle, and the foggy notion of how long it will take to pay your bill in full; those will soon be credit card hassles of the past.

On May 22, 2009, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act, a bill intended to increase industry transparency and help American consumers better manage their debt. Most of the provisions of the new legislation will be enforced beginning on February 22.

While the President referred to the Credit CARD Act reforms back in May as "common sense," opponents like Senator Tim Johnson of South Dakota, a Democrat, voted against the bill on grounds that it would make it more difficult for the already suffering credit card industry. South Dakota, which eliminated caps on interest rates decades ago, lured credit card operations from many major financial institutions, including Citibank (C), Wells Fargo (WFC), HSBC (HBC), and Target Card (TGT).

Despite the few dissenters, most experts agree that the legislation will bring about positive change for the 80% of American households that use credit cards, more than half of which carry a balance. Here are six major changes that will take effect on February 22:

1. When you open a new credit card account, your interest rate won't be subject to change for the first 12 months. However, there are a few exceptions. If you're 60 or more days late on your payment, or if the initial agreement carried a promotional offer of several months with no interest, your rate may be subject to increase. The same goes for a variable interest rate card.

2. If your credit card company wants to change your rate after the 12-month grace period, they'll have to notify you 45 days in advance of the hike before raising your rates on future balances. They must also give you the option to decline the new rate. If you choose to decline, you have the right to pay off your debt at the existing rate and repayment schedule. The same exceptions apply.

3. Card companies can no longer raise your interest rate retroactively, known as "double cycle billing." The new legislation also prevents card companies from raising your interest rate when you miss a payment on a different debt, known as "universal default."

4. People under the age of 21 are no longer allowed to sign a credit card contract without a co-signer, unless the person can demonstrate independent means of repayment. Solicitation on college campuses will be widely reduced and restricted, meaning credit card companies will no longer be allowed to offer free swag like pizza and t-shirts to entice naive students to open new cards.

5. Every billing statement must convey how long it would take to pay off your current debt if you only paid the minimum amount owed each month. Each statement must also inform you of how much you would have to pay on a monthly basis to be debt-free in 36 months.

Any payment you make above the minimum amount owed must go to the highest rate balance first. Currently, most credit card companies require that you pay off your lowest rate balance first.

"Through the CARD Act, consumers are going to be empowered to take control of their financial future," Gail Cunningham, spokesperson for the National Foundation for Credit Counseling tells Minyanville. "This will be a real eye-opener for millions of Americans who will now see each month just how serious their debt obligations are."

Since they won't be able to shift interest rates arbitrarily anymore, credit card companies won't have the same flexibility to manage risk as they used to. This may result in higher rates for everyone, and fewer individuals (and business owners spending on personal credit cards) getting access to credit, according to Peter Garuccio, a spokesperson for the American Bankers Association. However, it does give consumers the power to shop for the lowest rates by terminating contracts when better deals come along.

"If card holders don't like the changes coming to them on one card, they can say "thanks, but no thanks" and find a company offering better terms," says Garuccio. "Consumer choice will be a stronger driver of competition going forward because of the new rights customers now have."

Read more about the current state of credit here.
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