Credit News
by Tracy Becker
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Many of the new credit card rules have become active now! Feb 22nd marks the date of the majority of these laws taking effect. There will be more occurring in August as well. Here is a highlight of some important changes that have already begun. |
- Universal Default will be limited to future balances after late payments occur.
- Interest rates hike limitations with consumers being notified 45 days prior to changes.
- Limited credit extended to younger adults.
- Consumers have the choice to Opt-out of existing cards.
- Due dates and times made clearer.
- More time to make monthly payments.
- Reduced over the limit fees.
- Highest interest rate balances paid FIRST.
- The end of double cycle billing.
- Showing consumers the consequences of making minimum payments monthly.
- Limited fees charged to sub-prime credit card holders.
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Universal Default and limited rate increases- Universal Default will be an acceptable practice when it relates to existing balances. This means that if we are late on any account on our credit reports our creditors will not be allowed to hike up the interest rates on the balances already existing. They will be able to hike up future balances as long as they give us 45 days notice. If we have 0% balances when the pre determined time period ends we will see rates increase. This will apply to variable interest rate credit cards as well. Other than these situations credit issuers will not be allowed to increase rates in the first year. These changes are better than they were but if we have future late payments with any, or all, of our credit card balances we will still see rate increases within a period of time.
Limited credit extended to younger adults. Both young adults and all consumers can be asked for proof of income and debt before being approved- The rules that are currently taking effect will make it more difficult for young adults under the age of 21 to be approved for credit cards. Creditors will have to request proof of income from minors as part of the approval process for approving credit. If income does not substantiate credit card approval co-signers, over the age of 21, with the appropriate income can be used. Creditors will have limited ability to lure College students into credit card contracts. Freebies and giveaways cannot be used to attract students to apply for credit cards unless the promotion is conducted over 1,000 feet from campus borders. Gifts will be allowed if the person seeking a credit card does not have to fill out an application. Not only will minors have to show proof of income but Credit Card issuers will be allowed to request proof of income from anyone, at any age, who applies for a credit card. It used to be consumers would fill out a written or verbal application and whatever income was stated would be accepted no questions asked. Moving forward any issuer is supposed to request income verification, reviewing assets, and current obligations. One of the problems we have seen is various creditors had issued cards to consumers with no thought of other credit card obligations or limits. It will be interesting to see if this really happens and if there is any enforcement in place for creditors to actually use these procedures.
Consumers have the choice to Opt-Out of existing cards- Some creditors have already begun offering consumers these choices but is opting out of credit cards really a good idea? One of the new credit card laws of 2010 is that consumers have the right to cancel their credit cards if they don't like the offer they receive. If they choose to close the account they have 5 years to pay off the existing balance at the interest rate they had initially. There are problems with opting out that consumers should be aware of before they close accounts. When you close accounts your score can drop up to 60 points. The higher the score the more the score drops. Another problem is if the account was old and it is closed it will eventually be deleted off the credit report. When this happens the score could drop dramatically. Old credit is a treasure to the credit score. Creditors have the right to delete accounts after inactivity of 2 years. Many Creditors do not follow through on deleting inactive accounts since it cost them money each time they update the credit profile. The last point is if you close your account and have financial problems in the future you will not have access to those funds. If you start making late payments on other accounts you will not be approved for a new credit card at a time where you may need that credit to survive. My advice is to pay the account off and leave it open. If you want to use it in the future at least you know it is there.
Statement changes with due dates, summary of minimum payment ramifications, extended periods to make monthly payments, and changes to time of payment received patterns- Consumers will begin to see in-depth information on their credit card statements. This new practice is part of the July 2010 rule changes that will take effect in August. We may see these new formats on our statements earlier since some creditors will start before the deadline date. Some of this new information will show example cases of how long it would take to pay off a full balance with only minimum payments used. Statements will have clearer explanations of how late payments will affect our interest rates and what the fee tacked on will cost. Phone numbers will be listed for individuals to get exact information on time frames for paying off balances if only the minimum payment is made. If statements were automatically tailored to the individual, showing the length of time it would take to pay off the current balance with minimal payments, it would be much more valuable. The majority of consumers won't take the time to make a phone call. These changes will at least get people thinking more about the long term cost of paying minimum payments on credit card debt. We will find clearer due dates and times. In the past credit card issuers were able to set any time throughout the day as a deadline for payments. For example: If the creditor set 3:00 pm as a deadline for payments they could charge the consumer a late fee and raise their interest rate if the payment came in at 5:00 pm. If payments are due on weekends and holidays, but received the day after when the credit card company is closed for business, the consumer will not be subject to late fees. Creditors will also have to give individuals 21 days to make monthly payments. Many consumers were complaining that credit issuers were changing due dates on them without notice and when the payments were "late" the companies would then hike up the rate.
Fees charged for going over the limit will be a choice by the consumer- Consumers will be notified when they are over the limit and will be given the choice to pay extra fees for this service. Those who opt out would have their transactions rejected if they exceed their credit limits. Fees charged for going over the limit must be reasonable, whatever that means?
Highest interest rate balances paid FIRST- credit card issuers will be obligated to use your monthly payments, above the minimum, to pay down the highest rate portions of your balance due first. In the past if you had a 0% interest rate balance of $10,000 and another balance of charges that had an interest rate of 20%, on the same credit card, the lower interest rate balance would be paid first. With that method the credit card companies would make the most money on your balance owed. This new method is a start in the right direction for consumer protection from what seems to be predatory lending by credit card companies. This should take a large burden off many who have multiple types of balances on the same credit card accounts. Some individuals did not realize until the damage was done that the lower interest rate portion would be paid first. Others didn't have a choice with loss of income and high debt. If they had that $10,000 0% balance and a $2000 20% balance it could take a very long time, with diminished funds coming in, to reduce that high rate sum. This makes the transaction very costly, the exact opposite of their original purpose, at the end of the day. It is amazing the credit card grantors were allowed to get away with this loan shark behavior for so long!
The end of double cycle billing- Finance charges on current balances would be computed based on purchases made in the immediate cycle rather than going back to the past cycle to calculate. This practice hurts consumers who paid off their bills. They are hit with charges from previous balances even though they had been paid in full prior to the current interest rate charges.. Limited fees charged to sub-prime credit card holders- these changes would limit issuers from charging more than 25% of the limits in the form of account opening fees. This applies only to the first year. Issuers are also considering charging higher interest rates in general to make up for the forced reduction in initial fee.
So this is the beginning of some protection for consumers but there is much more needed. Feel free to call us if you have any questions!
"Great credit brings great opportunity!!"
Copyright © 2010 North Shore Advisory, Inc.
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