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New CARD Act Provides Clear & Simple Payment Rules

With so many misconceptions floating around, it's time to set the record straight on what has changed following passage of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. No, the Government isn't offering to pay off your debts. Instead, reforms simply make it easier to determine what you owe your creditors, and by how much and why that amount may increase due to interest and applicable fees if you repay your balance over time.

Signed by President Barack Obama on May 22, 2009, the legislation aims to end unfair rate hikes and hidden fees. According to a White House press release, nearly 80% of American families have a credit card, and 44% of families carry a balance on those credit cards. Unfortunately, Americans pay around $15 billion in penalty fees on their cards. One reason for this hefty figure is that consumers are sometimes confused by unjust or even deceptive credit card processes.

That said, the main elements of the reform legislation are to set strict limits on credit card processes by enforcing the following:

#1: No More Unfair Rate Traps

Remember the fine print on old credit card statements requiring payment by 1:00 p.m. on the due date? No more! Not only does the new law eliminate midday payment deadlines, but it also eliminates weekend deadlines and changing monthly due dates. Payments are now due the same day each month and are considered on time if posted by 5:00 p.m. In other good news, you'll have more time to make payments - at least 21 calendar days from the time bills are mailed to pay. Additionally, card issuers can't "double-cycle" bill by using previous-month's balances to calculate interest charges on current month's balances.

Further, to help you pay down debts faster, credit card companies must apply your excess payments to balances with the highest interest rate first. For example, assume you have a $2,500 balance and $500 is from a cash advance, which has a 25% interest rate compared to 15% for purchases. If you remit $200 rather than the $50 minimal payment due, the card company must apply the $150 difference to the cash advance balance. This process ultimately reduces the overall interest amount you'll pay over the life of the debt.

Finally, your interest rate cannot increase for the first 12 months after opening new credit except in these cases:

·        If your card has a variable interest rate tied to an index, your rate can increase whenever the index does.

·        If there is an introductory rate, it must last at least six months before reverting to the "go-to" rate disclosed when you first received the card.

·        Your rate can increase if your account is 60 days past due, or if you fail to make payments as part of a workout agreement.

Other fee-related changes include ending "over-the-limit" fees. Instead, issuers must obtain your permission before charging any amounts above your credit limit. Further, fees on subprime and low-limit cards will be reduced, and fees on stored value or gift cards are restricted until after 12 months of inactivity and following more effective communications.

#2: Understand What You Owe and Pay

Clearly written fee and interest explanations, both at account opening and in monthly statements, will help you make better credit decisions. For example, periodic statements must show cardholders how long it will take to pay off existing debts and the total interest incurred by making minimal payments only. Additionally, issuers must reveal the total payment amount (existing balance plus interest) if the cardholder pays off the card in 36 months. New statement formats will look similar to this example from the Federal Reserve.

#3: Bans on Retroactive Rate Increases/More Notification of Rate Changes

Banks can no longer raise your interest rate on existing balances unfairly. In addition, the law restricts retroactive rate increases due to late payment. Instead, issuers may assess annual fees, reduce your credit limits or raise your interest rate on future purchases - but only with 45 days' notice and an option for you to reject the increase by paying off your debt and cancelling the card with your creditor before the new rate takes effect. In such cases, you'll have five years to repay what you owe at your existing interest rate, and the card company can't require you to pay more than double the previous minimum payment. The 45-day notification policy applies to all significant changes (e.g., annual, late or cash advance fee hikes or interest rate increases).

#4: Accountability and Oversight

Remember those fine-print agreements you occasionally receive in the mail from your card issuer updating you on card policies and fee changes? If you're like many consumers who toss these updates in the garbage before reading them, you might find out too late that you're paying higher interest rates for one reason or another, or that your late payment fee has doubled.

To make sure you can always access and verify your card's terms and conditions, issuers must post existing and new policies on their Web sites at all times. Additionally, card companies must provide copies to the Federal Reserve Board, which will post them on its Web site. Increased visibility to this information will let individuals, regulators and consumer advocates monitor any changes and ensure cardholders' protections.

#5: Protection for Young Adults

Finally, card issuers and universities must disclose all agreements to market and distribute credit cards to students. For example, the two entities must be open and transparent about what financial benefit a school will receive if its students apply for and obtain certain credit cards.

In addition, card applicants under the age of 21 must have a co-signer before obtaining credit cards or otherwise prove their ability to pay their bills (e.g., with adequate income). This change could help students build positive credit histories without accumulating excessive debt. Additionally, changes to how interest and fees are presented on monthly statements should make it easier for students new to credit vehicles to truly understand how much their debt will cost them if they only make minimum payments against monthly balances or make late payments.

Take Responsibility for your Debt

At the end of the day, owning a credit card comes with responsibilities and a promise to repay any debts in a timely manner. While the new Credit CARD Act protects cardholders from becoming victimized by deceptive card practices including unfair rate hikes and hidden fees, the only person who can wipe away your debt is you. Therefore, take advantage of these new protections and make sure you always know exactly how much each swipe against your credit card may ultimately cost you. The protections are only part of the equation; you have to uphold your promise to repay your creditors, too.

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