President Obama signed the Credit Card Reform act (officially called the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009) last week and I’d like to offer my thoughts. First, let’s review the rules that will be put into place under this legislation:
- Institutions would be prohibited from treating a payment as late unless the consumer has been given a reasonable amount of time to make that payment. A safe harbor provision suggests that statements must be mailed 21 days in advance of the account’s due date. If the due date occurs on a day the postal service doesn’t operate, the payment may not be considered late if received on the next business day.
- When different interest rates apply to different balances, payments must be allocated according to a new method. The bank wil no longer be permitted to apply the entire payment only to the lowest interest balance.
- Banks would be prohibited from increasing the interest rate on existing balances. This doesn’t apply in the case of a variable rate tied to an index, nor the expiration of a teaser rate.
- Banks may not assess an over the limit fee due solely to a hold placed on available credit.
- Banks would be prohibited from double-cycle billing, i.e. calculating interest due based on prior months’ balance.
- Banks would be prohibited from financing security deposits or fees for the issuance or availability of credit if those deposits or fees ulitize the majority of available credit on the account.
- Banks making firm offers of credit advertising multiple annual percentage rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest annual percentage rate and highest credit limit advertised.
These are the major points contained in the 269 page pdf, available from the treasury web site (Note – The document may not open in some vbrowsers, right-click if you wish to download and read it). Now, let’s look at what isn’t addressed and the unintended consequences of this legislation:
- Grace periods – there is nothing here to stop banks from charging on one’s daily balance (as banks do with HELOCs.) As banks feel the squeeze on their bottom line, it would be simple to do away with grace periods entirely, and any use of one’s card would accrue interest.
- Annual Fees – I have a number of credit cards, all of which I pay in full each month, so the interest rate is of little concern so long as the grace period is in effect. The only card that carries an annual fee is the one that offers me airline miles. I suspect that moving forward, few cards will offer no annual fee.
- Reduced rewards – One card I carry offers a 2% rebate into a 529 (college saving) account. With no fee, this card is a no brainer to use. I’ll expect a letter soon that the reward percentage is being reduced.
- Reduced/Canceled credit lines. Self-explanatory, but perhaps the worst of the potential results. Remember, as I discussed some time ago, your Credit Score (FICO) is made of of multiple factors, one of which is credit utilization (the percent of your outstanding line used). So, you may only owe $3000 on a card with a credit line of $10000, and think all is well. But the bank then reduces your available limit to $5000, and now your percent used has doubled, possibly impacting your credit score.
This is one story I am certainly going to follow, as we all have an interest (pun intended) in its outcome.