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Publicity about the Credit Card Act focuses on positive changes for consumers along with rumors of increased fees for customers with excellent credit. Last week, in Part 1 of this series, I summarized the advantages of the legislation.
Unfortunately, it’s not a totally positive story. Here’s the underbelly of the new credit card bill:
- There are no limits on how high your interest can be raised. In 1978, the U.S. Supreme Court allowed nationally chartered banks to set credit card interest rates, which are legal in the state where the bank is headquartered. This ruling eliminated usury laws, leading to credit card interest rates higher than 30 percent. A reader from New Jersey recently reported it’s cheaper for him to borrow from the mob than use a credit card. Carefully read all correspondence from your credit card companies. Watch for interest increases before the legislation takes effect.
- When your charges exceed 50 percent of the limit on your account, your credit scores begin to drop. If you max out a card, you’re likely to shave 100 to 150 points off your credit ratings. Using accounts to their limits will crater your credit. Lower credit scores provide a legitimate reason for your credit card providers to raise your interest rates and lower your account limits. To increase credit scores slowly, you must use no more than 30 percent of your credit limit on any account. To raise scores more rapidly, never use more than 10 percent of any account limit. This information will not be disclosed by financial institutions; the legislation ignores this issue.
- You will receive a 45-day notice before any changes in your accounts, and you will have the option to close an account rather than accept a change. However, this option will prove unhelpful to many during an ongoing economic downturn. When calling their credit card companies to ask for hardship terms, while they’re living on unemployment insurance and actively searching for a new job, readers report their accounts have been closed. Although your credit is excellent, you may be forced to keep credit cards with high interest rates and fees because your income has diminished and you don’t want to risk ending up with no credit available because you disclose your situation to your lender.
- Under certain circumstances, your creditor can establish a 5-year repayment program for your debt. While this may seem like a positive idea at first glance, your ability to make payments will depend on your balance, the interest rate, and your income.
- The legislation leaves it up to financial institutions to establish “reasonable penalty fees.” Given the recent behavior by many lenders, this seems unreasonable and no limits have been set for fees. Look for fee increases during the next two months. After the new regulations apply, there is specific oversight by the Comptroller of the Currency, Federal Deposit Insurance Corporation, Director of the Office of Thrift Supervision, and National Credit Union Administration Board. Until we observe fee structures moving forward, we will not know whether lenders propose fair practices.
- There is no provision made for a no interest grace period after a purchase. You could make a purchase and interest will begin to accrue immediately. If you use an immediate interest credit card, you will probably want to set up online bill pay. Make your purchase with the credit card and pay in full online on the same day. You’ll have the convenience of card use, while eliminating interest.
- This legislation does not pertain to commercial accounts used by small businesses. It is only applicable to consumer accounts.
- Commercials for not-free credit reports must now audibly disclose that there is actually a place, AnnualCreditReport.com, where you can receive free credit reports. However, nothing in the bill requires the verbiage to be easy to understand.
- The final issue addressed in this bill is one of those inane turn-offs that happen in Congress. It has no relationship whatsoever to credit cards. Section 512 of the 513 in the Act: Protecting Americans from Violent Crime. Federal and state laws have prohibited the use of firearms in the 83,600,000 acres of the National Park System and the 90,790,000 acres of the National Wildlife Refuge System. Section 512 changes those laws. Guns can now be used in National Parks and National Wildlife Refuges.
I regret the White House has changed their policy of making legislation easily accessible to the public. You can no longer click through the Signed Legislation section of the White House web site to actual bills. Now, all you find are news releases, presidential comments, and fact sheets that spin the story. Transparency of legislations is opaque. The link above (to the bill) goes to the Library of Congress. However, their URLs to specific versions of legislation change.
Parts of this bill go into effect in 90 days, 6 months, 9 months, and 15 months. The Board of Governors of the Federal Reserve System is charged with detailed oversight of credit card practices by financial institutions. The Board was delegated authority to create regulations to enforce the Act. As is often the case when big business throws millions of dollars into lobbying against legislation, it falls short of protections consumers need – especially with no ceiling on interest rates and fees, and no disclosures regarding the consequences of using the full credit limits on accounts. On the whole, the Credit Card Act creates positive changes, and may force lenders to behave more ethically.