The New Rules for Credit Cards from the Federal Reserve

Effective February 22, 2010 the Federal Reserve adopted new regulations concerning obligations imposed upon credit card companies to protect consumers. These new regulations involve disclosure to consumers now required; rates, fees and limits on same; and notice as to alterations in fees and services provided.

Recall that credit cards, and banks for that matter, are exempt from the laws on usury. See our companion article on usury. As such, these protections are vitally important for the user of credit cards to understand and utilize. This article shall summarize the most salient alterations in the law.

Added Disclosure Requirements Imposed:

1. The credit card company is required to give you forty five days prior written notice before they:

   - increase your interest rate;

   - change certain fees (such as annual fees, cash advance fees, and late fees) that apply to your account; or

   - make other significant changes to the terms of your card.

1. If your credit card company intends to make changes to the terms of your card, it must give you the option to cancel the card before certain fee increases take effect. If you take that option, however, your credit card company may close your account and increase your monthly payment to pay off any remaining balance, subject to certain limitations.

For example, they can require you to pay the balance off in five years, or they can double the percentage of your balance used to calculate your minimum payment (which will result in faster repayment than under the terms of your account).

1. The company does not have to send you a 45-day advance notice if:

- you have a variable interest rate tied to an index; if the index goes up, the company does not have to provide notice before your rate goes up;

- your introductory rate expires and reverts to the previously disclosed "go-to" rate;

- your rate increases because you are in a workout agreement and you failed to make your payment as agreed.

1. How long it will take to pay off your balance.

Your monthly credit card bill must include information on how long it will take you to pay off your balance if you only make minimum payments. It must advise as to how much you would need to pay each month in order to pay off your balance in three years.

For example, suppose you owe $3,000 and your interest rate is 14.4%–your bill will probably look similar to this-

• Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 late fee and your APRs may be increased up to the Penalty APR of 28.99%.
• Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:

New rules regarding rates, fees, and limits:

No interest rate increases for the first year. Your credit card company cannot increase your rate for the first 12 months after you open an account. There are some exceptions:

- If your card has a variable interest rate tied to an index; your rate can go up whenever the index goes up.

- If there is an introductory rate, it must be in place for at least 6 months; after that your rate can revert to the "go-to" rate the company disclosed when you got the card.

- If you are more than 60 days late in paying your bill, your rate can go up.

- If you are in a workout agreement and you don't make your payments as agreed, your rate can go up.

Increased rates apply only to new charges. If your credit card company does raise your interest rate after the first year, the new rate will apply only to new charges you make. If you have a balance, your old interest rate will apply to that balance.

Restrictions on over-the-limit transactions. You must tell your credit card company that you want it to allow transactions that will take you over your credit limit. Otherwise, if a transaction would take you over the limit, it may be turned down. if you do not opt-in to over-the-limit transactions and your credit card company allows one to go through, it cannot charge you an over-the-limit fee.

- If you opt-in to allowing transactions that take you over your credit limit, your credit card company can impose only one fee per billing cycle. You can revoke your opt-in at any time.

Caps on high-fee cards. If your credit card company requires you to pay fees (such as an annual fee or application fee), those fees cannot total more than 25% of the initial credit limit. For example, if you initial credit limit is $500, the fees for the first year cannot be more than $125. This limit does not apply to penalty fees, such as penalites for late payments.

Protections for underage consumers. If you are under 21, you will need to show that you are able to make payments, or you will need a cosigner, in order to open a credit card account.

- If you are under age 21 and have a card with a cosigner and want an increase in the credit limit, your cosigner must agree in writing to the increase.

Changes to billing and payments:

1. Standard payment dates and times. Your credit card company must mail or deliver your credit card bill at least 21 days before your payment is due. In addition:

Your due date should be the same date each month (for example, your payment is always due on the 15th or always due on the last day of the month).

- The payment cut-off time cannot be earlier than 5 p.m. on the due date.

- If your payment due date is on a weekend or holiday (when the company does not process payments), you will have until the following business day to pay. (For example, if the due date is Sunday the 15th, your payment will be on time if it is received Monday the 16th before 5 p.m.)

1. Payments directed to highest interest balances first. If you make more than the minimum payment on your credit card bill, your credit card company must apply the excess amount to the balance with the highest interest rate. There is an exception:

   - If you made a purchase under a deferred interest plan (for example, “no interest if paid in full by March 2012″), the credit card company may let you choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, the credit card company must apply your entire payment to the deferred interest-rate balance first.

2. No two-cycle (double-cycle) billing. Credit card companies can only impose interest charges on balances in the current billing cycle.

Conclusion:

Credit cards may be a useful tool but they are also the most expensive access to borrowing outside of organized crime. Banks are not subject to the usury laws thus, once the interest is compounded, can often charge in excess of eighteen percent per annum for access to money. Given that most banks pay less than two percent on savings accounts or certificates of deposit, it is clear that credit cards are the first type of debt that should be paid off by any consumer…or business. While the above rules are helpful and necessary to make informed decisions about use of cards, the real control needed is limits on interest rates to be charged and other related fees and the banking lobby is unlikely to allow such protections to pass. Thus, the consumer is required to protect him or herself and the information above is a good first step in understanding proper use of this vital but dangerous economic tool.

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