New credit card rules and what they mean for you

Finally the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration decided it was time to act to help consumers get a fairer deal with credit card issuers. Unfortunately improvements required won't take affect until July 1, 2010 unless your credit card company decides to do so voluntarily at an earlier date.

The most important change is that universal default will no longer be legal. Right now using the terms of universal default a credit card issuer can jack up your interest rate to the maximum allowed by law - in some states as high as 30 to 40% -- if you missed a payment on another card. We hear complaints almost daily from people who saw the interest rate on all their cards increase because they had one late payment on one card even though they've paid on time for years. In many cases this one late payment was an error corrected on a later billing, but the damage was done.

As long as you make at least the minimum payment on existing balances within 30 days of billing, you won't see your interest rates jacked up to 25 or 30% or more. Banks can still increase rates if the card has a variable rate or a promotional rate set to expire.How will the new regulations help you:

* You will be able to save money in interest payments by paying off your highest balances faster. Right now credit card issuers regularly apply your payment above the minimum balance to the outstanding balance with the lowest interest rate. That means balances at higher interest rates continue to build up more interest. The new regulations will require issuers to apply payment to the highest interest rate balance or proportionally to all balances.

* You will get at least 45 days notice of a change in terms on your credit card to give you time to react and adjust to changes in terms and conditions. Prior to this new rule you only got a 15 days notice.

* You must be given more time to make a payment. Regulations will require a reasonable time of at least 21 days to pay your bill.

These new regulations also prohibit:

* Unfairly computing balances with two-cycle billing. Right now creditors calculate interest based on more than one cycle of charges. That will no longer be allowed.

* Unfairly adding security deposits and fees for issuing credit or making it available.

* Excessive fees for sub prime cards. The fee will be capped at 50% of the credit limit and allow cardholders to pay off initial balance over a year. Fees exceeding 25% must be spread over no less than six months rather than
charged as a lump sum.

Banks believe they'll lose a lot of money. "By eliminating the issuer's ability to raise rates at 'any time for any reason,' these regulations force banks to give up a lot of interest revenue and the timing couldn't be worse for these financial institutions. They are going to have to make adjustments to their own business model. I wouldn't be surprised to see them raise a few fees and interest rates to make the most of this time before July 2010," says Bill Hardekopf, CEO of "People who have recently received a large rate increase are asking if this will be retroactive and benefit them. I don't think it will be retroactive."

He expects banks and financial institutions to respond by:

* Reducing the availability of credit. They may accept fewer application for credit cards. It will be much more difficult for those with poor credit to qualify for a credit card.

* Limit their exposure to risk with lower credit limits and higher interest rates. "The banks are saying that they may have to raise rates for everyone to cover potential losses for risky customers," says Hardekopf.

* Reduce intro rate offers for balance transfers. "In the last six months, we have seen several issuers reduce intro offers from 12 months to six or three months. They are also increasing the rates from 0% to as high as 3.99%," says Hardekopf. "Nearly every issuer charges a 3% balance transfer fee and most have eliminated the maximum cap for this fee."

Unfortunately, I believe Bill Hardekopf is right about how the banks will respond initially to these changes. The only way we can fight back is to stop using cards, even if you do have good credit. Credit card companies make fees on every charge you make even if you pay the bill in full. If fewer people use credit cards then they will have to do something to get customers back

Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score" and "Surviving a Layoff," due out in January.
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