As you may be aware, Congress just passed a credit card reform bill that helps protect consumers, such as you and I, from the big bad credit companies.   Although this bill has gotten almost unanimous support from law makers, there have been a few who aren’t happy with the new regulations.  Take  Edward Yingling (CEO of the American Bankers Association), for instance, who stated that it would  “undermine the availability of credit” by restricting individual institutions’ ability to price credit against risk.  Oh. my. god.  You mean banks would actually have to only give credit to people who can manage it??  The horror!

It sounds all good and well on paper, but sifting through legislature is a serious bore and rarely dictates how these changes will affect you as a consumer, so we’ve sifted through the muck, picked out the most pertinent changes and explained, in layman’s terms, what these regulations actually mean for you.

Restricts all interest rate increases during the first year

We’ve all applied for a credit card and gotten a 10% interest rate, when all of the sudden you get a note in teeny tiny print stating that for no reason your APR has skyrocketed up to 16%.  Why does this happen?  Basically, because credit card companies can, and without reason.

Now credit companies are not allowed to increase interest rates during the first year, although this does not include variable interest rates “introductory rates” like 0% interest for the first 6 months.  Make sure you read the fine print to make sure you aren’t setting yourself up to get fleeced by insane interest rates after the introductory period.

Increases notice for rate increase on future purchases

Often, by the time you received a notice about a rate increase, it was already in effect or would be by the time you paid your next bill.

The new rules are increasing the notice time from the previous 15 days to 45 days.  You’ll also now have 3 billing cycles to decline the new terms.  However, if you’re under a promotional rate, they have no obligation to mail you a reminder that your APR is going up.  Same thing goes if you haven’t submitted your payment within 60 days of the due date.

Preserves the ability to pay off on the old terms

Prime example of this one is a bank takeover, like Chase’s recent purchase of Washington Mutual.  I had a Washington Mutual credit card with a great APR and free monthly credit scores sent to me.  When Chase took over in March of this year, my APR went up around 5% and my due date was changed — without prior notice.  (I received a notification, but it didn’t arrive at my home until the rate had already kicked in.)

The new rules allow consumers to pay off their old balance on their old term.  For example, if I had a balance of $300 with a 10% APR with Wamu, then once my account switched over to Chase, I would still be paying off the $300 at 10%APR, although any additional credit used on top of that balance would be on Chase’s new terms.

Places limits on fees and penalty interest

This one covers quite a bit, so here are a few bullet points:

• If your APR is increased due to a late payment (60 days after the due date), and you make regular payments on time for six months, they are required to restate your original interest rate.

• You will not be able to go over your credit card limit and be charged fees (unless you specify otherwise).

• No more fees can be assessed to make a payment unless it is going through an outside service rep (like Western Union).

• If card issuers increase the ARP, they must review the account every six months and issue a rate decrease if indicated by the review.  (I really do not see this happening).

• The Federal Reserve Board will issue standards to decide on reasonable and fair fee levels.

• There will be no more “2 cycle billing” — this is pulling charges from two billing cycles when assessing interest, which would obviously increase interest payments.

Requires fair application of payments

You know how, when you take out a cash advance on a credit card, the interest rate suddenly pops up from 10% to something excruciatingly high, like 23%?  Then, when you go online and try to pay off the cash advance, lo and behold there is no way to break up your payments to pay off the higher interest portion first.  Your payment is automatically applied to the lower interest balance, which can really screw you over if have a large balance that you can’t pay off in full.

Now credit card companies will be forced to apply any payment you make to the highest interest earning portion of your balance.

Provides sensible due dates and time to pay

Right now credit card companies are only required to send out billing statements 14 days prior to their due date, resulting in a higher chance that you’ll send in the bill late.

The reform mandates that they send out statements 25 days prior to the due date to give consumers sufficient time to receive and pay their bill.

Protects young consumers

Remember when you signed up for that credit card in college and got a free t-shirt and a meal coupon for signing your life away?  Credit card companies are going to have a harder time pulling this one off now.

Young consumers (under the age of 21) must have either a co-signer above the age of 21 on the account, or must have an independent means of repaying extended credit: ie not daddy’s pocket.  Furthermore, they won’t be able to increase the interest rate on cards with cosigners without the written consent of the cosigner.  They’ll also be restricted from sending pre-screened offers to anyone under the age of 21 and exchanging gifts for filling out applications on campus.

While this most likely won’t stop lots of kids from getting credit cards too early, it will certainly make it more difficult and could lower the amount of credit students are approved, especially since risk will be taken more into account.

*These changes should go into effect within 9 months.

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1. To Charge or Not to Charge: Should Credit Card Spending be Restricted for Young Adults?
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