The recently enacted Credit CARD Act of 2009 gave consumers some valuable protection against card rules that, for some consumers, were the equivalent of financial quicksand. Before this new law, provisions included in the fine print of credit card agreements left borrowers subject to what many felt were draconian penalties, including interest rate jumps and huge fees.
Post-reform, however, those same borrowers run the risk of feeling bulletproof. Yet while the law does give them some protection, it's also got a few holes.
The bill's basics
In general, the bill does many useful things. It prevents creditors from changing rates until they give cardholders 45 days' notice, with no rate hikes in the first 12 months after a new account is opened. Promotional rates have to last at least six months.
In addition, several confusing practices, such as double-cycle billing, have mostly been eliminated. Card companies must apply payments first to balances that are incurring the highest interest rate. They must also mail statements to customers at least 21 days before payment is due. And while companies can still raise rates based on delinquent payments, they have to lower them back if customers stay current on payments for six months.
The bill doesn't just apply to cards from Visa (NYSE: V ) or MasterCard (NYSE: MA ) . Store cards from businesses like Target (NYSE: TGT ) are also subject to the bill's standards.
What the bill doesn't do
As favorable as the bill is for cardholders, it doesn't do everything. You don't get advance warning of a rate increase if it's based on a variable rate, such as the prime rate. Moreover, the bill didn't impose an interest rate ceiling.
More importantly, card companies will inevitably respond with other ways to make up lost revenue from the bill's provisions. The "grace period" between when you make a purchase and when interest starts accruing could disappear. Cards without annual fees might not be nearly as available as they are now. Perks and rewards will likely get scaled back, with more companies following the lead of American Express (NYSE: AXP ) and JPMorgan Chase (NYSE: JPM ) in forfeiting perks if you stop paying your bills on time.
Also, card companies will likely lower credit lines and stop granting increases as easily. Borrowers with weak credit may notice that the most, so customers of banks like Capital One Financial (NYSE: COF ) and Citigroup (NYSE: C ) should pay close attention, as almost one-third of each of their credit portfolios are made up of subprime credit card accounts.
Finally, new fees will likely start to replace the old ones that have been eliminated. Even before the law went into effect, Bank of America (NYSE: BAC ) and Discover Financial (NYSE: DFS ) both upped their balance transfer fees, on which there's no cap. The rest still have the right to do the same at any time. Late fees and cash advance fees are also still uncapped.
With that in mind, here are some smart moves you should follow now to augment your consumer credit rights.
- Open and read all written correspondence delivered by your credit card companies.
- Shop for credit card issuers that don't charge a fee simply because you're not generating enough revenue for the issuer otherwise.
- Foster long-term relationships with card issuers that treat their customers right -- even if you pass up a shiny bell or whistle elsewhere.
- Know your interest rate(s) for all of your accounts at all times.
- Don't use a credit card if using cash or a check is an option.
- Consider store-specific cards if they make sense in light of your credit options.
- Cash in your rewards early and often.
- Make all payments on time.
Common sense? Yes, but these ideas are also easily forgotten. Even with the new law looking after our rights, we can still let our credit responsibilities falter just by forgetting about them for a few days at a time.