Fifty years ago, the answer to this question would be cash or pictures of the grandchildren. Today, most people would answer, “Plastic.” According to the Federal Reserve Bank of Boston, Americans carry on average four credit cards and currently owe more than $900 billion to lending institutions.
In good financial times, these numbers would be sobering. In the harsh economic climate of the last 30 months, such debt levels can paralyze. And to make matters worse, credit card issuers have increasingly turned to revolving credit lines to enhance sagging corporate profits. New fees for consumer credit programs are announced daily, while the average interest rates for standard bank credit cards have topped 19 percent.
Key provisions of the national Credit Card Accountability, Responsibility, and Disclosure (CARD ) Act, which went into effect in February, seek to improve consumer disclosures regarding credit card interest rates and billing schedules, while ending the more offensive industry practices involving credit cards. The act stops short, however, of capping interest rates and fees.
For example, credit card issuers may no longer arbitrarily raise interest rates on existing balances unless a promotional rate has expired, a variable indexed rate has increased, or a payment was received more than 60 days late. This means that the practice of “universal default”—raising one’s credit card rate based on payment records with other, unrelated credit issuers—will cease for existing credit card balances. And if a cardholder does trigger a higher default interest rate due to late payment, after August 22 of this year, the bank must restore the lower rate once the cardholder demonstrates six months of consecutive on-time payments.
However, lending institutions can still raise rates at any time for any reason on new balances with only 45 days advance notice. This means cardholders will still need to read correspondence from their creditors.
Another key provision deals with over-limit fees. Cardholders will no longer be charged such penalties unless they elect to allow transactions that exceed their credit limits to go through rather than be denied. And payments received by the due date—or the next business day if the bank doesn’t accept mailed payments on the due date—will no longer trigger a late fee.
Unfair billing practices have also come under review. The new law bans double-cycle billing—the practice of basing finance charges on both the current and previous balances. Under this calculation method, banks could charge interest on debt already paid off the previous month.
Fairer payment allocations are also provided in this legislation. No longer can banks apply above-the-minimum payments to lower-interest-rate balances first. The Credit CARD Act requires that excess payments be applied first to the credit card balance with the highest interest rate.
One of the biggest changes applies to credit card issuance to students. Consumers under age 21 who cannot prove an independent means of income or provide the signature of a co-signer older than 21 will no longer be approved for a credit card, making it less likely that banks will offer free pizza on campus as an enticement to sign up for one.
The most noticeable change, though, will be on your monthly statement. Banks are now required to disclose how long it will take to pay off current credit card balances if cardholders make only minimum payments each month. Further, issuers must provide information about how much cardholders will have to pay each month if they wish to pay off their balance in 36 months.
The Credit CARD Act brings needed changes to deceiving credit card marketing practices and outrageous fee structures. However, it does not do away with the need for common sense: consumers will still need to live within their means and pay what they owe. That part of the equation will never change. If credit card debt remains a problem in spite of this new legislation, then “plastic surgery,” cutting up one’s cards, may be the only solution.
James G. Mentzer , CLU, ChFC, has been a financial planner since 1986. He is currently director of planned giving for the United Methodist Foundation of Raleigh, N.C.