Why credit card rules changes were passed

The push for credit cardholder rules changes was led by consumer groups who believed that more oversight of this industry was required to prevent deceptive and unfair practices. They also believed that the rules would improve public confidence and provide consistency among all of the credit card issuers. Objections by the credit card industry were insufficient to kill the changes in an environment where credit defaults were increasing at an alarming rate, and the government was dealing with the implosion of the subprime mortgage market. The credit meltdown, and fears that it could get much worse, have resulted in the most dramatic clampdown on the credit card industry in many years.

Video: Credit Cardholder Rules Changes

Summary of the new law

Perhaps the most significant change is a provision that will forbid increases in interest rates on existing account balances. Interest rates may only be raised on new credit cards and future purchases or advances on existing cards. Also restricted is the allocation of all payments to balances with lower interest rates, when a borrower carries balances with different rates. Credit card lenders are now required to apply any payment above the minimum to the amount of the outstanding balance with the highest interest rate. Cardholders must now be given 45 days notice before any changes are made to the terms of an account, which is triple the standard practice of 15 days notice. This includes the imposition of higher penalties and rates for paying late or missing payments.

Video: Regulators expected to make sweeping credit card rules changes

How changes will affect consumers

The new rules will give consumers additional leeway by prohibiting unreasonable time constraints on payments. They also prohibit excessive penalties for going over the credit limit solely because of an account hold that is in effect. Issuers cannot make deceptive credit offers or require security deposits and fees for making credit available. Issuers cannot compute balances using double-cycle billing where two months are used to calculate the average daily balance. The changes also impact people with bad credit who apply for a subprime card with a higher interest rate. These cards typically have no more than a $500 credit limit but require a large upfront fee that is now capped at fifty percent of the credit limit. The cardholder may pay off the initial balance over a year rather than immediately.

How credit card companies may change

According to a study by the law firm Morrison & Foerster, the changes could cost the industry more than $10 billion a year in interest payments. In order to offset these losses, it’s possible that the credit card companies will create new schemes and tactics to replace the ones that have been banned. One option is to raise fees to both consumers and the merchants who honor the cards. Another is to raise interest rates which are already high on most commercially available cards. This is a backhanded way of getting the customers who pay their bills to make up for losses on those who don’t. They might also explore changes to their billing methodologies, but this will be more difficult with the new rules in place. The changes could also result in a reduction of the number of cards issued to consumers with low credit scores or limited credit history.

What consumers should do

The best advice is to use common sense and shop around for the best deals in the marketplace. Find a card with no or low annual fee and the best interest rate available. Many cards offer rewards or points for using the card, but these offers are often provided at the expense of higher fees. Those fees are only worth paying if the value of the rewards will clearly exceed the amount of the fee over the membership period. Limit the number and type of cards to those you really need and actually use. Pay off the entire balance whenever possible to avoid finance charges. If that isn’t possible, make monthly payments that consistently exceed the minimum payment due. This will minimize the total amount of interest paid and will greatly shorten the time span needed to completely pay off the card.