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New credit card law will impact terms

Grace periods: The law mandates that consumers receive their periodic statements at least 21 days before the due date. Payments cannot be considered late unless the bill was sent on time.

If there is a grace period, it must span at least those 21 days.

In our survey, we found that issuers offered a grace period of 20 or 25 days.

Intro rate for purchases: APRs on credit cards can't increase for the first year after the account is opened. Exceptions include expiration of a promotional rate, termination or completion of a workout plan, a change in the index rate or a 60-day delinquency.

Default APR: The law doesn't set a usury cap on default rates. However, it does say that closure or cancellation of an account cannot trigger the default rate. Balances on closed accounts are treated as existing balances. Issuers are prohibited from increasing the rate unless one of the four exceptions for retroactive rate increases applies.

Applying payments to balances: Bankrate found that all of the issuers surveyed allocate payments to balances with the lowest interest rate first before higher-rate balances.

The Credit CARD Act reverses this practice so that issuers must apply the payment first to the highest-rate balance, then to the next highest and so on until the payment is spent.

This provision will benefit those who accept a balance transfer or cash advance offer and then use the card to make purchases. Usually, these balances have different interest rates.

How rate is set: The law does not instruct lenders how to set rates.

Minimum payment due: Periodic statements will have to include a warning about the cost and increased repayment time if the consumer makes only the minimum payment each month. They must also explain how long it would it would take to eliminate the balance by making only the minimum payment each month, and what the total cost and payments would be if the balance were repaid in 36 months. Consumers will see a toll-free number they can call for information about credit counseling and debt management services.

This requirement is one of those attempts to legislate a nugget of financial literacy. Consumers should know that over time, minimum payments cost more than larger ones. Let's hope cardholders learn this fact long before they discover the minimum payment warning.

See Bankrate's study results.


Editorial Disclaimer: The editorial content is not provided or commissioned by the credit card issuers. Opinions expressed here are author’s alone, not those of the credit card issuers, and have not been reviewed, approved or otherwise endorsed by the credit card issuers.

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