How will credit card reform affect your wallet?

The new law makes it more difficult for credit card companies to charge higher-risk customers higher interest rates and fees. To make up the difference, issuers say, they need to raise the terms even for good borrowers.

Here is a breakdown of the reforms and how they might affect your wallet:


— They prohibit universal default

Consumers had long complained about credit card companies raising the interest rates on one card for being late or missing a payment on a separate account, even if they had remained current on the first card. The practice was known as universal default, and card companies said missing payments on other accounts increased the risk of lending to a customer, which in turn meant higher interest rates. The new law not only bans universal default but also prohibits card companies from raising interest rates on outstanding balances, as long as you pay the bill on time. But beware: Issuers can still change the rate on new charges as long as they give you proper notice.

— They put time limits on some interest rates

The law requires promotional interest rates to last at least six months. For new credit card accounts, issuers cannot raise interest rates for the first year. Card companies are also required to review your account regularly and lower your rate if appropriate.

— They restrict some fees

Credit card companies will no longer be able to charge a fee if you go over your credit limit. In fact, those transactions will probably be declined. But consumers who want the choice of paying a fee to go over their limit can opt in to the program. In addition, card companies cannot charge a fee for any method of payment, including mail, phone or electronic transfer. But if you need to make an expedited payment with the help of a live person rather than a recording, card companies may still charge for the service.

— They set ground rules for processing payments

Let’s say you have a credit card with multiple balances at different interest rates. And let’s say you pay more than the minimum each month. That extra money will go toward the balance with the higher interest first, helping you pay down the debt faster.

— Billing statements will have more information

Your new statement will have to disclose the penalty for any late payments and warn you that they could result in higher interest rates. It also includes a warning about the dangers of making only the minimum payment required. For example, a sample statement released by the Federal Reserve features a chart that outlines how long it would take a customer to pay off a $1,784.53 balance if only the minimum payments of $53 are made. It also shows that by paying just $9 more per month, a customer could save more than $1,000 in interest and pay off the balance in just a few years.

— They restrict access to credit for people younger than 21

Underage consumers will no longer be able to open a credit card account without a cosigner or proof that they have independent income. Card companies also won’t be able to raise the credit limits for underage consumers without the cosigner’s approval. The measures were intended to target aggressive marketing by credit card companies to members of an age group who consumer advocates think were being financially shackled for the rest of their lives by debt racked up in college.

Via Washington Post