The overhaul of the credit card industry is being hailed as a triumph for long-abused consumers. But before you start banking on falling interest rates or vanishing fees, you might want to read the fine print.Credit card legislation that Congress sent President Barack Obama on Wednesday bans certain practices by card issuers, but there's still no limit on the charges that can come with your monthly statement. And it's likely credit card companies will start searching for additional ways to earn profits.
That means cardholders across the board — even those who always pay on time — will probably see higher charges on a variety of services.
Obama is expected to sign the bill in the coming days. Credit card lenders will then have nine months to be in compliance.
Here are some questions and answers about protections the bill spells out — and others that it doesn't.
Q: What practices are still allowed that I should be aware of?
A: The bill doesn't cap interest rates, as some lawmakers had hoped it would. While lenders generally can no longer raise rates on existing balances — at least until the cardholder is very late with payments — they can still raise them going forward.
That's true even for people who already saw their rates climb in recent months. The bill doesn't shield from further hikes in coming months — or ever.
"With all these limitations, (card issuers) still have a lot of freedom to charge what they want," said Ruth Susswein, a spokeswoman for Consumer Action, an advocacy group in Washington, D.C.
Q: What if I always paid my bills on time?
A: There will likely be higher fees and interest rates across the board to make up for lost profit.
Card issuers in the past few months have already started raising fees for services such as balance transfers and cash advances. It's a trend that's likely to continue in the near future.
Card issuers also might start charging higher rates at the outset, when a customer gets a new card.
Getting approved for a new credit card will probably be harder, too — even for those with a solid credit history. And if approved, the card will probably come with a lower credit limit than in the past.
With credit so much harder to come by, people could begin turning to outlets such as payday lenders and pawn shops, said Greg McBride, senior analyst with Bankrate.com.
"In the absence of credit cards, people in need of a short-term loan will resort to other means," he said.
Q: What can I expect to happen in the next nine months?
A: Be on the lookout for any letters from your credit card company. They could be notifications about rate or fee hikes as card issuers prepare to get in compliance with the new bill.
"The next nine months are going to be filled with issuers implementing changes while they still can," McBride said.
Q: So what specific practices DOES the bill ban?
A: Card issuers will no longer be able to raise interest rates on existing balances. The exception is if a payment is 60 days late; at that point, there's no cap on how much they can hike rates. If the cardholder pays the minimum balance on time, though, the lender would be required to restore the lower rate after six months.
Among other restrictions:
• Consumers will have to get 45 days' notice and an explanation before their interest rate could be increased.
• If a company uses "risk-based pricing" to raise rates on riskier borrowers, they have to use that same methodology to lower rates when appropriate.
• The Federal Reserve in coming months will determine what constitutes "reasonable and proportional" penalty fees. This might include a cap on the dollar amount card issuers could charge for penalties such as late fees.
• Card issuers can charge a fee for over-the-phone payments only if you speak with a live operator. Charges will no longer be allowed for automated phone or online payments.
• You will have to opt in for the ability to go over your credit limit, which can trigger a fee as high as $40. Issuers will also be limited to charging three over-the-limit charges for a single infraction. So if your balance goes over the limit and you fail to make any payments, you could only be charged over-the-limit fees for three payment periods; right now, issuers can continue charging that fee indefinitely on unpaid balances.
• Those 21 and under will need to show they have an independent source of income to get a credit card. Otherwise, they will need a co-signer.
Q: How will my communications with my card issuer change?
A: For starters, you might be getting your bills sooner; companies need to send statements at least 21 days before payments are due under the new bill.
Card holders will also be able to clearly see how much it's costing them to borrow. For instance, monthly bills will come with little boxes stating how much they've paid in interest and in fees year-to-date.
Statements will also spell out how long it will take to pay off a balance if only a minimum payment is made. And companies will need to include a toll-free number where the cardholder can get information about credit counseling and debt management.
Q: How does the new legislation differ from other regulations that were recently imposed?
A: Some of the new rules were already spelled out in regulations adopted by the Federal Reserve this winter; those regulations go into effect in July 2010.
The new bill is more specific and offers greater protection by making the changes law. In general, laws are much more difficult to alter or eliminate than regulations as they require an act of Congress.
While some of these measures are probably good (making it more difficult to get a credit card), most of the effects we feel will probably be negative. The rate hikes are obvious, but I've heard of a couple others on the radio in the past couple days. I haven't found confirmation of them yet, so take it with a grain of salt at this point, but I wanted to pass them along just in case they turn out as badly as predicted. One of them was that interest would be charged from the moment of the purchase rather than the normal 25-30 days later at the end of the monthly cycle. Another is that these credit card companies will not be allowed to pursue (or it will be much more difficult to pursue) compensation from people who default on their payments. That means, of course, that the credit card companies will have to make up their losses on the backs of the people who are responsible enough to pay their bills each month through extra fees and higher interest rates. It's exactly like the mortgage bailout.
The bottom line is that responsible living is the way to get out of this. Pay off your debt as soon as is humanly and legally possible, and set the credit cards aside. If you're not in a position to do that quite yet, watch very carefully so you don't get screwed even worse in the coming months.
There's my two cents.
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