Edward Yingling, president and CEO of the American Bankers Association, recently warned that now “less credit will be available generally, which means some consumers and small businesses will not be able to obtain credit cards at all, particularly younger people and start-up small businesses.” But Sen. Chris Dodd (D-Conn.), the driver behind CARD in Congress, thinks such claims sound “a little like Chicken Little.”
I am inclined to agree with Sen. Dodd and describle the industry's statements as exaggerations and a the banking sector's innate hostility to any further regulation; Most of the changes seem reasonable, with some slight exceptions. And, while I don't think this is much of a concern for our clients, this seems like a good time to review the changes that the CARD Act will bring as it's phased in over the next year:
Limited interest rate increases. If the credit card company wants to hike interest rates, it will now have to inform a customer at least 45 days beforehand and provide a written explanation.
New restrictions on retroactive rate increases. Under the new law, the interest rate on an existing balance cannot increase unless the customer is more than 60 days behind on a payment. Even if that happens, the credit card company will have to restore the prior, lower interest rate if they pay the minimum balance on time for the six months that follow.
Statements mailed 21 days in advance. This was a particularly sleazy practice by card issuers, but an irresistible temptation for larger entities. The new rules say that your monthly bill has to be mailed to you by the credit card company at least 21 days prior to the payment due date.
Pay before 5:00pm EST and you are on time. Another questionable practice that will go the way of the Dodo - Now all credit card payments made before 5:00pm Eastern Standard Time will be considered paid on that day. If your payment due date falls on a holiday, a weekend, or any day on which the credit card issuer is closed for business, your payment cannot be subject to late fees.
Borrowers can choose to attack the highest interest rates. Certain kinds of transactions could have different rates some credit cards. Under the new law, a borrower will be able to apply any payment above the minimum to your highest-rate balance.
More protection for teens and young adults. The new legislation bars companies from issuing cards to most people under age 21. Those younger than 21 will only be able to use a credit card under one of the following conditions:
- They can prove they have the means to pay the debt (or their parent or guardian promises to pay it off if they default)
- They are emancipated minors
- They are designated secondary cardholders on a parent or legal guardian’s account
Restrictions on cards issued to college students. College-age Americans will still be able to get credit, but within reason. Account limits will be either 20% of their annual income or $500, whichever is greater. So this market will grow less attractive for credit card companies.
An end to universal default. If you make a late payment to one credit card issuer, other issuers will not be able to hike your rate as a consequence.2
Cardholder permission for over-limit fees. Credit card companies now have to get your OK before they can process a transaction that would put your account over its limit.
Why are credit card companies crying? As I stated earlier on - all industries resist regulation as an innate response, but there's some reason to believe that it will hurt larger players in the card industry. Cut out all the nickel-and-diming, and credit card issuers will be left with lower revenues. So where are they going to get the money back? Think reduced rewards for cardholders, new and inventive annual fees and card services linked to balances held at depository institutions.
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