News - Certified Public Accountants - Omaha, NE

New credit card rules may help you rein in debt

In recent years, credit cards have become a mainstay of the American economy. With the economic downturn, the use of credit cards has been even more prolific, as a source of funds during un- and under-employment.

Many Americans find themselves overextended and in serious financial trouble because of credit card debt. Add to those facts the practices that credit card companies have used in recent years to extract interest and fees from consumers, and many people can see no end in sight to their credit card debt dilemma.

The Federal Reserve Board recently enacted rulings to protect consumers from creative practices of credit card companies and to provide more complete information to consumers on their debt situation so that they can make better-informed decisions. The rulings are amendments to Regulation Z, otherwise known as the Truth in Lending Act.

Additional credit card rules go into effect in August

New credit card protections were announced recently by the Federal Reserve. The changes will be effective on Aug. 22, 2010.

Under the new rules, a credit card company cannot charge you a late fee of more than $25 unless one of your last six payments was late. In the case of a late payment, the company can charge you a fee of up to $35. Or, the company must be able to show that the costs it incurs, because of your late payments, justify a higher fee.

Your credit card company also cannot charge a late fee that is more than your minimum payment. For example, your late fee is limited to $20 if your minimum payment is $20.

And, you cannot be charged a fee for exceeding your credit limit of more than the amount by which you exceeded the limit. If you exceeded your limit by $10, the fee cannot be higher than $10.

The new rulings also protect you from inactivity fees. If you have a card that you do not use, the credit card company cannot charge you a fee because the card is inactive.

Multiple fees on a single transaction that violates your cardholder agreement are prohibited as well. In other words, if you made a payment late, you cannot be charged more than one late fee for that instance of failing to pay on time.

The card company can no longer increase your card's annual percentage rate without an explanation. And, if the company increases the rate, it is required to evaluate the increase every six months. If the evaluation reveals that a reduction is suitable, the company must reduce your rate within 45 days from the date of the evaluation.

The main points of the rulings follow:

Notice of increasing fees. With a few exceptions, credit card companies must notify you 45 days in advance of any changes in your interest rate or fees, such as annual fees, late payment fees or cash advance fees. They must give you the option of canceling your credit card if you do not wish to incur the increased fees. Be aware, though, that canceling your card may result in a required acceleration of payments to handle existing balances on the account.
Information on interest you will incur. Credit card statements will now include a section that explains clearly how long it will take you to pay off your credit card’s current balance if you make only the minimum required payment. The statement will also show how much you will pay in interest if you use the minimum payment option. In addition, it will explain the specific result of making a higher-than-minimum payment – quicker payoff and less interest.
First-year freeze on interest rates. Credit card companies cannot increase your interest rate for the first 12 months you have an account, with a few exceptions. If you signed up under an introductory rate, that rate must be good for at least six months, and you must have been notified at the time you opened the account of the interest rate that would apply after the introductory period. Also, if you open a credit card account that is tied to an index, the interest rate can increase anytime the index increases. You can also be charged a higher interest rate if you are more than 60 days late in making a payment or if you default on a workout agreement.
Increased rates applicable only to new charges. If your credit card company increases your interest rate, the new rate will apply only to purchases made after the effective date of the rate change. Prior balances will incur interest under the previous interest rate.
Restrictions on over-the-limit transactions. You must opt-in to allow charges to take you over your credit limit. If you have not done so, any charge that would take you over your limit will be turned down.
Protection for underage buyers. Individuals under 21 years of age will have to prove their ability to repay balances or engage a co-signer to be able to obtain a credit card.
Standard due dates and times. You must receive your credit card statement 21 days before the due date, and the due date must be the same date every month. The payment cutoff time must not be before 5 p.m. on the due date. Holidays or weekends will push the due date to the next business day.
Payments directed to highest interest balances first. With some exceptions, payments will be applied first to balances with the highest interest rates. This will keep credit card companies from applying payments in a way that increases the total interest due.
No double-cycle billing. Credit card companies can charge interest on balances in the current billing cycle only.

There are some exceptions to most of these provisions. As arduous as it may be, the best advice is to read carefully the credit card agreements on the cards you hold, especially if you receive a notice of changes to your account.

Because of the restrictions imposed by this ruling, credit card companies will have to find new ways to maintain revenues. This could result in new fees and charges for the privilege of holding and using credit cards.

To read more, visit the Federal Reserve website by clicking the link below: http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm.

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