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Reform Helps Credit Card Holders

By: Investor Solutions

By: Investor Solutions

How did something so obviously wrong take so long to correct? Recently established reform passed by lawmakers will protect credit card holders from dubious acts by banks. These reforms are also intended to make it easier for you to manage your account. Most of the law will go into effect 9 months after it was signed into law by the President in late May 2009, which makes February 2010 the deadline. These laws, which will be helpful to know, are only one step to removing you from under the thumb of excess credit card debt. It will be up to you and how you manage your budget and payments to do the rest.

Things you should know about the reform.

These changes have been made to help increase transparency and keep the card holder from being caught off guard by sudden rate hikes. Therefore, all interest rate increases are restricted during the first year except when it’s under a variable interest rate, the end of a promotional period or if you’ve missed a minimum payment after 60 days from the due date. Moreover, all rate increases are restricted on existing balances except under any one of the previously stated instances. After a year the issuer can increase rates as long as the holder is given a 45 day notice.

 

The new law places limits on fees and penalty interest. As if it even needed to be debated, the two-cycle billing practice is prohibited. An issuer can no longer group together an earlier billing cycle when calculating the amount of interest charged for the current cycle. No fees can be charged to make a payment. No over-the-limit fees can be charged unless the holder asks for their transactions to be able to exceed the credit limit. Previously, everyone could go over the limit and as a result, incur additional costs. Now, unless you elect that option, charges would be denied once they are at or just below the credit limit. These actions make obvious sense and they eliminate the over-billing credit card companies were doing.

Perhaps the most important and fair change is that any payment in excess of the minimum required payment must be applied to the balance with the highest interest rate. Before these new laws, the practice was to pay off your lower interest rate balances first leaving those higher rate balances growing and subsequent liquidation of that debt unattainable by many. For instance, if you made a balance transfer from another credit card to take advantage of a low interest rate offering and subsequently purchased goods with the same card, you would have to pay off the entire transfer balance before you could get to the recently purchased balance. Assuming average credit card interest rates, that balance could be costing 10% – 20% after the first 30 days if it wasn’t paid off. The exception to this rule is if a deferred balance is coming due within two months. In this case they will allocate the payment to the deferred balance which may have a higher interest rate

The bill also went as far as protecting gift cards, which is interesting enough given the holiday season was just upon us. So I’ll quickly note that gift cards cannot expire less than five years from the later of the date the card was purchased or money was last added. No fees can be charged to the gift card unless it has been unused for 12 months. In this case there can be one fee a month. State laws apply for both the expiration dates and fees.

Which one first?

The government has stepped in and made the playing field more level, now help yourself unload your financial burden. Credit cards should be the first place you look when trying to return to fiscal adequacy. Credit cards have the highest interest rates of all your loans. Even though they may not be the largest debt you have, if you’re rolling over your balance from month to month they are the costliest. Paying down this debt first will help you reduce your monthly payments, decrease your overall debt burden, and increase your credit score.

Some have suggested that paying down the credit card with the highest rate is not the best strategy for everyone. That certainly could be true if you are trying to reduce your monthly payments. In this case you should pay off those lower balances completely, even if they have lower rates, so you can reduce the number of creditors asking you for money. This will reduce some of those minimum balances you have to pay and make it easier to balance your budget on a monthly basis

1. http://www.creditcardreform.org/pdf/credit-card-bill-2009.pdf

2. http://maloney.house.gov/documents/financial/creditcards/MAY22.FinalCreditCardBill.pdf

3. http://www.defendyourdollars.org/CC%20summary_1.25.2010.pdf