Credit Card Reform: What it Means for You (and Your Debt)

February 22, 2010 marked the beginning of some much-anticipated credit card regulations, including limits on fees and interest rate hikes. The regulations, which are part of the May 2009 credit card legislation, are aimed at protecting consumers from some of the credit card industry’s more questionable tactics.

Consumers and advocacy groups are praising the new rules. So are many of the millions of Americans who face hefty credit card bills every month. But how much will the new legislation actually change the way credit card companies do business? And how much protection will you actually get?

Reading the Fine Print

Here’s the bottom line: There are lots of good things about the new regulations. But it’s important that you don’t develop a false sense of security. As always, the details on these changes – and how they will affect you – will most likely end up in the fine print. You know, that teeny-tiny stuff that most people don’t read.

So, it’s great that a credit card agency has to notify you 45 days ahead of an interest increase. But the not-so-great part is, a lot of people won’t read the fine print that lays out the exceptions to this new rule. For example, if you’ve recently opened a new account, your rate may change when your “introductory period” ends. An introductory rate must be in place for six months; after that the rate can automatically shift to the “go-to” rate that was disclosed when the card was issued.

At the end of the day, with or without the new regulations, you’re still in debt. And creditors will continue to make a hefty profit . . . . they’ll just do it in different ways.

The Pros

Like I said, there really are benefits to the new legislation. Here are a few of the highlights:

1. Minimum payment warnings. Your credit card company is required to tell you how long it will take to pay your debt (and how much total interest you will pay) if you only pay the minimum monthly payment . . . and how much it would take per month to pay your debt off in three years. One thing to keep in mind, though: These scenarios assume that no additional charges are added to the accounts. So, if you keep charging to the account, the time it takes you to get out of debt and the total interest paid will continue to increase every month.

2. New restrictions on interest rates for existing balances. The new legislation is making it harder for credit card companies to hit you with sudden changes in interest rates on your existing balances. However, this restriction doesn’t apply to future charges (see #2 on the “Cons” list), and there are some exceptions (see #3 on the “Cons” list).

3. Notice of rate increases and fees for new charges. Credit card companies must give you 45 days’ notice before increasing interest rates (on purchases made after the notice) or changing their fee structures.

4. Standardized billing procedures. Your credit card company has to send your statement 21 days before your payment is due. Holidays and weekend due dates are extended to the next business day, and your payment due date has to be the same every month.

5. No more automatic overdraft protection. Really, this is a “pro”: According to the new legislation, you are no longer defaulted into the overdraft protection program – you have to sign up for it. Banks are aggressively “selling” this to consumers because last year they made over $25 billion on overdraft fees. You’re better off to stay “opted out” of this. If you do have a charge declined, it will be a wake-up call, and it may even be a little embarrassing . . . but it won’t cost you the $39 fee.

6. Tougher qualifications for people under 21. Today, it’s not unusual for 20- and 30-somethings to graduate college with mountains of credit card debt (and that’s in addition to sky-high student loans). Now, people between 18 and 21 will have to meet income requirements or have co-signers.

The Cons

Of course, you have to take the good with the bad. There are a lot of things that aren’t covered in the new legislation:

1. No restrictions on fees. Although there is a restriction on the amount a company can charge you for your application fee and your annual fee (it’s 25% of your initial credit limit), other types of fees are still fair game for credit card companies. They can charge you anything they want in the way of other “fees” – fees for being a cardholder, late fees, fees for too much (or too little) activity – you name it. The only difference now is that your credit company is now required to give you 45 days’ notice before changing or increasing your fees.

2. New customers and new purchases aren’t as protected. The new regulations on interest rate increases only apply to the existing balances. When it comes to new customers, creditors have the freedom to set interest rates as high as they want. And, while customers existing balances are protected, their new purchases may not be safe from future rate hikes.

3. There are a lot of exceptions to the new rules. So, the rates on your existing balance cannot be raised automatically . . . unless the card is on a variable rate agreement (which most are now). Or if your payment is 60 days late: In this case, the rates on the existing balances can be increased. Of course, you can get your lower rate restored on your existing balances if you make six consecutive, on-time payments – although this may be hard to do because your minimum monthly payment will increase significantly upon missing a payment.

4. Legislation doesn’t cover prepaid cards or payday loans. These credit card alternatives (often utilized by people with no credit or bad credit) still gouge customers with astronomical interest rates and fees at every turn.

The Reality of Debt

There’s no overnight fix when it comes credit card debt. While the new legislation will help you avoid some nasty extra fees and surprises, you’ll still have to do your part to get out of debt (and stay there).