September 2009 Topic - Credit Card Reforms

Recession is something that Americans have become accustomed to hearing. We are all well aware that our economy has spiraled out of control and we are trying to pick up the pieces. Over the past couple years many people have lost a lot of income and have turned to credit cards and loans as a means of financially surviving.

Credit card debt is at an all time high of nearly $1 trillion dollars and is still increasing daily. The average household carries over $9100 in credit card debt. Most consumers pay on average over 20% interest on these cards.

01.  Gross & Public Debt Over the Years
02.  Bans on unfair fee traps from creditors
03.  Disclosures & Rules on Rate Increases must be in plain language
04.  Pre-Qualification for Young Consumers & Accountability

---

1. Gross & Public Debt Over the Years

Too many of us now are struggling to eliminate the balances on these cards. The lenders do not help with doing so, considering they raise interest rates and charge fees every chance they get.

It is a vicious cycle that consumers get into with credit cards. I am sure most of us can relate to this scenario. You receive your Visa bill in the mail; you make an on-time payment of $100, which I may add is over the minimum. Yet, the next month to your surprise the balance has only decreased by a few dollars. You sit there dumbfounded and then realize the majority of payment was applied to interest.

To make matters worse creditors are taking advantage of Universal Default. Universal default allows creditors to raise your interest rate if you were late to any debt. Let me give you an example, you have a Macy's bill, Sears bill and a Bank of America card. The Macy's bill and Bank of America bill received payments early, however you were late the Sears bill. Bank of America randomly runs your credit and see's the late payment. You may receive an interest rate hike now not only through Sears, but also through Bank of America.

Yes, this is legal and happens more than you may realize. Many practices that the credit card industry practice have not been watched closely enough in the past. Recently though the government has put into effect some guidelines. To my knowledge Universal Default was not mentioned in these reforms.

On May 22,2009 President Barack Obama signed the CARD Act of 2009. CARD stands for the Credit Card Accountability, Responsibility, and Disclosure. It is no secret that credit card companies have been deceptive to consumers. Each year, Americans pay around $15 billion in penalties. Furthermore, nearly 56 percent of families carry high balances on credit cards.

Unfortunately many cardholders are not aware of the way that the credit card lenders work. The issue lies with the fees and hidden costs that the creditors charge. There has been a lot of misinformation about the reforms. Outlined below is exactly what this new reform will consist of.

---

2. Bans on unfair fee traps from creditors

End late fee traps: Lenders will be required to give cardholders at least 21 calendar days from time of mailing. This part of the protection went into effect on August 20,2009. It will eliminate traps such as weekend or midday due dates.

Enforces Fair Interest Calculation: Creditors must now apply the excess payments to the highest interest balance. In addition to that double-cycle billing will be eliminated. Double-cycle billing is when the creditor uses last month's balance to calculate this months interest.

Over limit fees: Lenders will have to obtain a cardholders permission to allow any transaction that would place the account over the limit

---

3. Disclosures & Rules on Rate Increases must be in plain language

Contracts and disclosures must be in plain language

Creditors will be required to give consumers clear disclosures of terms prior to opening an account. In addition to that it will be mandatory for creditors to detail every fee being charged.

Issuers will need to provide how long it will take to pay off the existing balance if the consumer chose to pay minimum payments. Furthermore, the creditor must provide how long it will take to pay the debt in 36 months.

Credit card contracts are currently available in hard copy. With the new reform issuers will be required to make contracts available online.

Interest Rate Increases

Creditors may only raise the interest rate in the first year after a credit card is opened if:

The increase is under a variable interest rate

At the end of a promotional rate

If the minimum payment is 60 days late.

After the first year, the lender can raise the rate on future purchases with 45 days notice. The issuer does not need to inform you of a rate increase if the above reasons apply.

If you receive an interest rate hike because the minimum payment was not received within 60 days, the rate must go back to original if the cardholder makes on-time payments for six months.

No fees may be charged to make a payment unless it is an expedited payment through a representative.

Any lender who raises the interest rate on a cardholder must review the account every six months.

No card issuer will be allowed to change the terms for repaying a balance. However, they can require the borrower to pay the full balance within 5 years at the old rate or raise minimum payments.

---

4. Pre-Qualification for Young Consumers & Accountability

Pre-Qualification for Young Consumers

Any applicant under 21 years of age must either have a co-signer over 21 years old or information proving means of repaying the funds borrowed.

Lenders will be prohibited from raising credit limits on accounts obtained by a person under 21 who has a co-signer without written permission from the co-signer.

Persons under 21 years of age are not to receive any prescreened offers unless they have consented to do so.

Card issuers cannot provide incentives to students on campuses in exchange for applying for a credit card.

Accountability

Regulators will report annually to Congress to be sure the cardholders are being protected.

Regulators will need to update the rules and implant any new disclosures that might be needed.

After reviewing the new reform many of us feel relief, while others think what is the catch? There is no way to tell what these new laws will do to the credit card industry or the consumers. Let's start by pointing out the obvious it is great that the government has finally stepped in. They have finally made an attempt to help out struggling cardholders.

On the other hand, keep in mind prior to these reforms going into effect the creditors are raising interest rates and fees to consumers. In addition to this, many lenders are lowering credit lines on cardholders. By doing this it affects us in more ways than many of us realize.

Take a moment to think about our foreclosure rate and unemployment rate. Picture this someone has a home equity line of credit of 50,000 available. This person carries a mortgage every month, but recently was laid off and has been paying the mortgage through the equity line. What happens to that person if the equity line is decreased? The answer is the mortgage is not going to be paid until that homeowner finds a job, which in reality could be months. Unfortunately, the home may go into foreclosure by that time.

The credit card industry will not have a choice other than to start raising fees on everyone. Everyone will include the cardholders who do pay their bills on time and avoid high balances. There are a lot of people who use plastic simply for the benefits, such as airline miles and other perks. These days will probably be limited.

Now in the middle of recession a lot of borrowing options have been eliminated. Credit cards seem to be the only option for struggling Americans. Creditors are able to take advantage of this and price appropriately.

The question that lures in some Americans minds is will this turn our country into a mostly cash society? Even if it does would that be so bad? Some may think that is exactly what the credit card companies deserve. Only time will tell.

---

Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us - to reserve your seat contact our Education Team on 561-883-2398 Ex.310

Newsletter 09
Rev.1
September, 2009