While new regulations may directly help some consumers, they could indirectly raise the burden on others.
By Rachel Haig | 08-29-09 | 06:00 AM | Email Article

Since Obama signed new credit card regulations into law on May 22, 2009, there has been widespread speculation on the effects consumers will feel. Supporters of the bill argue that the new law, called the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, is an important step in protecting consumers from profiteering credit card companies. Critics, however, contend that the new regulations will punish responsible card users for others' shortcomings.

Rachel Haig is assistant site editor for Morningstar.com.

Before jumping to one camp or the other, let's take a look at exactly what the new law entails. The bill has two stages of implementation, the first of which just took effect on Thursday, Aug. 21. The bulk of the changes, however, will not take effect until Feb. 22, 2010 or later.

As of Aug. 21:

  • Issuers must provide 45 days' notice before changing fees or interest rates. Previously, only 15 days' notice was required.
  • Issuers must send the bill at least 21 days before the due date. Payment may not be due before 5 p.m. or when the business is closed. Previously, the bill only had to be sent 14 days before the due date.
  • Consumers have the right to opt out of interest rate and fee increases--they can cancel their accounts and pay off the balance at the original rate. Before, this option was only available at the issuer's discretion.

After Feb. 22, 2010:

  • Issuers cannot raise interest rates on existing balances, except under these conditions: 1) a promotional rate expired; 2) another rate to which the interest rate was indexed increases; 3) a payment is 60 days late. If the bank raised rates after a late payment, it must restore the lower rate after six months of on-time payments.
  • Issuers can raise rates on new balances at any time, provided there is 45 days' notice.
  • Issuers can no longer raise rates because a customer failed to pay an unrelated creditor.
  • Beyond the minimum payment, issuers must first apply payments to the balance with the highest interest rate--for example, to the cash advance rate before regular interest rate. Previously, issuers applied payments to the lowest interest balances first.
  • Customers can opt out of over-limit fees so that transactions over their credit limit will simply be declined. Creditors must notify customers of this option annually. Issuers may not charge more than one over-limit fee per billing cycle, and cannot charge for going over the limit due to a fee or interest charge.
  • "Double-cycle billing," in which card companies based finance fees on the previous cycle's balance in addition to the current balance, will end.
  • Marketing contact with college students will be limited, and students under 21 must prove they have sufficient income, have a parent co-sign, or take a certified financial education course to quality for credit.

Click here to read the full text of the bill.

How Will the New Law Play Out?
Ultimately, we think both supporters and detractors have valid points. The bill does address industry practices that run counter to consumers' interests. But in doing so, the new laws will reduce revenue for the banks--that shouldn't come as a surprise, as the bill is designed to protect consumers from practices that issuers use to make easy cash.

Given the reduction in revenue that banks face under the new law, it's not surprising that they are looking for other ways to maintain their profits. The obvious places to expect changes? Annual fees and reduced benefits.  Citigroup  recently announced that it will charge some of its account holders an annual fee that did not exist previously. The Wall Street Journal reported that Citigroup is experimenting with a range of fees, some upwards of $30. Other card companies, such as  Bank of America ,  American Express , and  Capital One , told the Journal that they had not adjusted fees, but only  Discover  went so far as to say it did not plan to start charging an annual fee.

So while the new law may help some consumers navigate their credit agreements and avoid exorbitant and unexpected charges, it may raise the burden on other consumers. Credit card users who pay off their balance every month could now be charged more per year (in annual fees) and receive less back in rewards than before (though they will not be targeted more than other customers). Although these credit card holders may feel like they're excellent, responsible customers, it's worth noting that, to the card companies, they have historically offered fewer opportunities for profit.

Will the new regulations help consumers navigate their credit agreements and avoid exorbitant and sometimes unexpected charges? We think so. Will it mean more annual fees across the board, even for people who have never run into problems with the credit industry? It's certainly possible.

How Should You Respond?
1. Familiarize yourself with the legal requirements, and read all correspondence from your card company carefully.
2. Continue paying off your balance every month (or paying it down as much as possible if that's not an option). If the terms of your card change in a way you are uncomfortable with (for example, fewer rewards or higher fees), you'll have the flexibility to switch cards.
3. Use card-comparison sites to see fees and benefits side-by-side. You may have to do more digging than before to find a keeper. Try BankRate or CreditCards.com.

For more discussion of navigating the credit card maze, check out Morningstar's interview with Peter Pham of BillShrink.com.

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Rachel Haig does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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