Happy belated birthday to the Credit Card Accountability, Responsibility and Disclosure Act. It turned 4 years old a few months ago. The law was designed to protect consumers from nefarious credit card charges, though it doesn't appear to be saving consumers from themselves. More than half of the 14,000 people questioned in a recent J.D. Power survey said they didn't understand the terms included in their cardholder agreements. As a result, they may not be aware of the benefits afforded them in the CARD Act.
With that in mind, let's go over some of the ways the CARD Act protects consumers.
One of my favorite rule changes is the end of "double-cycle" billing. This prohibits card issuers from using the balance from the previous month to calculate interest charges for the current month. Before the CARD Act, you would be charged interest for the month's credit card balance even if you'd paid down part of that balance during the month. Now, your credit card can only charge you for the outstanding portion of your balance.
Next is the end of "universal default," which allowed card issuers to raise your interest rate for late payments on other accounts or for any reason at any time. In addition, the CARD Act prohibits interest rate increases for late payments unless the account is more than 60 days late in the first year. If your card issuer boasts about keeping interest rates in check despite a late payment, realize that they're betting that you don't know that they're now require to do so by law. Basically, they're trying to sell you on a benefit that is already free.
The last change I'll mention is how payments must be allocated. Before the CARD Act, issuers would typically allocate your payments above the minimum to the lowest-interest-rate balance first. Now, all payment amounts in excess of the minimum must be allocated to the highest-interest-rate balance.
To assure you are using the credit cards best suited to your repayment style (carry a balance, pay in full monthly), it is important to understand the terms of your cardholder agreements. Card products are complex and can be very expensive if used unwittingly. Some cards charge annual fees and offer rewards, other cards offer introductory interest rates well below prime, but then change to a variable rate. If you take the time to find the right card, you will likely save yourself some money. And you'll know when someone is trying to sell you something you already get for free!
Steve Bucci is Bankrate's Debt Adviser and the author of the popular "For Dummies" series books: "Credit Management Kit for Dummies" and co-author of "Managing Your Money All-In-One for Dummies." To ask a question of the Debt Adviser, go to the "Ask the Experts" page and select "Debt" as the topic. Read more Debt Adviser columns and more stories about debt management.