Some good news: Today's the day that the much-ballyhooed Credit Card Reform Act goes into effect, offering consumers some new protections against surprise rate hikes and hidden fees.
This is a good thing, at least for credit card holders -- for once, the ballyhooing is on target. Among the key provisions:
- No more retroactive rate hikes. You know that thing the banks used to do where you were a week late with the payment and they doubled the rate on your whole huge balance? They can't do that anymore. Rate changes can only be applied to new charges, not pre-existing balances.
- No more rate bait-and-switch. Unless you sign up for a variable-rate card or are more than 60 days late with a payment, rates can't be raised on a new account until it's 12 months old -- except when an introductory rate expires by its original terms.
- No more shell games with payment due dates. From now on, they'll have to be the same every month.
- No more targeting students. Citigroup (NYSE: C ) pulled this one on me in college, and AT&T's (NYSE: T ) old financial services company and American Express (NYSE: AXP ) (among many others) got many of my friends back when I was in school. The idea was this: Give young people with no significant income a credit card, wait for them to run it up, then threaten dire circumstances in the hopes that the young person's parents (or somebody) will bail them out. No more -- cards can't be issued to anyone under 21 unless an over-21 adult cosigns, or unless the student has enough independent income to demonstrate an ability to pay off a card balance.
- No more expensive surprises. Unless you have a variable-rate card, the banks now need to give you 45 days notice before they increase your interest rate, start charging new fees, or make other major changes to the terms of your card.
It all looks like good stuff, and there are more changes that will take effect this summer.
But if you think credit cards just became a happy, benevolent force for good, think again.
Meet the new banks, same as the old banks
New rules to curb the worst of the abuses made famous by supersize credit card issuers like Citi, JPMorgan Chase (NYSE: JPM ) , Bank of America (NYSE: BAC ) and Capital One (NYSE: COF ) are certainly welcome, but they aren't going to change the two biggest factors in America's ongoing battle with its credit cards:
- Issuers will still strive to maximize profits. They can't pull the old tricks, but they will certainly think up new ones as they strive to improve their profit margins. Annual fees are already back in vogue, along with new charges like "inactivity fees" and higher charges on balance transfers. Moreover, with Visa (NYSE: V ) and MasterCard doing their best to extract as much in merchant fees as possible, I suspect it's only a matter of time before a completely new set of dubious tactics emerges.
- Running a balance is still a bad idea! If we've learned anything from the financial disasters of the last two years, it's that spending more than you earn is a bad plan. A standing credit card balance is a money sink as well as a source of constant low-level worry for many -- but hugely profitable for issuers.
If you want to get rich and stay rich, paying off your plastic in full every month is a great place to start. If you have a balance now, make paying it down a high priority. Yes, even higher than investing -- the "returns" on paying off a high-interest balance are almost always the best available, and unlike the returns from hot stocks, they're guaranteed.
Handling your credit is just one way to get your finances under control. Tune in as Fool contributor Dan Caplinger presents his five-day fix for your finances.