CARD Act protects consumers

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Dear Debt Adviser,
Recently, I consolidated three credit balances into one, using a special finance offer through a bank. The terms of using the check provided were that I would pay only 4.99 percent interest on this balance (the entire balance I have with them) until it is paid off. I was very careful about choosing the offer that allowed me to keep the rate “until the balance is paid off.” Since I do not use this card for any purchases I assumed this was a safe thing to do.

Now I am worried that the bank may change the terms on the account and wipe out this promotional rate. Do I have more to worry about than the bank forcing payment earlier (four years is what I had planned to pay off the debt) with the new credit card rules? How high can the interest rate go? The minimum payments? Thanks in advance for your help.
— Ed

Dear Ed,
I can understand your discomfort. I recently bought a new TV, with no interest due for three years. The interest savings were considerable and I found it hard to resist a bargain. Still, I worry about making a small mistake and being hit for all the interest the store waived. I’m glad you are paying attention to the fine print in your cardholder agreement.

Many of the regulations included in the new Credit Card Accountability Responsibility and Disclosure Act, or CARD Act, of 2009, will not become effective until February 2010. So, while card issuers have been making changes to cardholder agreements for the past few months due to many factors including the economy, they also want to get policies in place before the upcoming restrictions and changes of the CARD Act go into effect.

Here are some of my favorite provisions in the CARD Act:

  • Card issuers who have been raising rates retroactively will no longer be allowed to do so. Nor will they be able to use a universal default clause to raise the rate when the cardholder never paid late.
  • They will be required to provide better disclosure of teaser rates and those rates must last at least six months.
  • The time to make your payment will increase to 21 calendar days from the day a card statement is mailed.
  • Payments made in excess of the minimum payment will be applied to the highest interest balance first while double-cycle billing, or calculating interest charges based on the previous month’s balance, will be eliminated.
  • Your permission will be required to process transactions that would place the account over the limit and incur a fee.
  • And my very favorite, the card issuer will be required to include an estimate of how long it will take to pay off a balance at the minimum payment rate along with a referral number to a nonprofit credit counseling agency if that time frame gives you financial cardiac arrest!

Because you have a rate that states “until balance is paid,” your cardholder agreement may allow changes to your interest rate if you are late with a payment. Because your new rate would likely be 29 percent or more, I suggest you make your payment at least a week before it is due to avoid any chance of it being late.

What I believe may be your likeliest eventuality is an increase in your minimum payment. Most cards figure their payments based on a seven- to 10-year repayment payment. Because you have a plan in place to pay the balance in four years, even if the minimum payment percentage is increased, it may still be lower than what you are currently paying each month.

To be on the safe side, I’d calculate what 5 percent of your current balance payment would be and be sure you can pay that amount if need be, or have a plan that will allow you to pay off the credit card via balance transfer to another card or another loan product.

One last caution is to watch out for a decrease in your credit card limit that would bring your balance to more than 50 percent of your card limit. This may lower your credit score even if you make payments as agreed.

As for me and my new flat screen, I plan to keep one eye on the TV and the other on my mailbox to make sure my payment gets out on time.

Good luck!

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