Credit card reforms pass
- Existing balances will not be subject to increased APRs.
- Card issuers must give 45 days' notice of rate increases; now only 15 days are required.
- Issuers can no longer apply payment to lowest APR balance only.
On Dec. 18, 2008, regulators approved sweeping credit card reforms that will provide significant benefits for consumers.
"The strong new regulations announced today by the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration are unprecedented in their scope and signal the beginning of a new market structure for credit cards," Edward L. Yingling, president and CEO of the American Bankers Association, said in a statement. He says the regulations crack down on practices such as universal default, double-cycle billing and the application of rate hikes to existing balances.
The rules, some of which were first proposed in 2007 and others in May 2008, will take effect on July 1, 2010. The OTS-approved version will apply to savings associations, federal credit unions will abide by the NCUA rules and the FRB regulations will pertain to banks.
Among the upcoming changes:
- No rate increases on existing balances. The issuer cannot apply a rate hike to your balance unless you're 30 days late making a payment, a promotional rate expires or the adjustment is tied to an index-related movement. The company can apply a rate increase to future balances, provided the account has been open for a year and the company provides 45 days' advance notice, but they can't retroactively zap charges you already made. (Currently, issuers only have to inform cardholders 15 days prior to a rate increase.) They can do so, however, if you pay 30 days late. This change will end universal default for existing balances. The company can jack your rate for future purchases, but it has to give you 45 days' advance notice.
- No more double-cycle billing. Double- or two-cycle billing is a method of computing interest charges that uses the average daily balance from the current month and previous month. While such a ban protects consumers, Curtis Arnold, the founder of CardRatings.com, contends it's not a huge win since most issuers have ended this practice.
- No pro-issuer payment allocations. When an account has multiple balances at different interest rates, any money paid over the minimum must be applied either to the balance charged the highest rate or equally to all balances. This change helps consumers with multiple balances -- due to balance transfers, cash advances and new purchases -- save money in finance charges when they pay down balances.