It's about time. This week, Americans will finally start to benefit from the first wave of credit-card reforms enacted by the Credit Card Accountability Responsibility and Disclosure Act of 2009.
Those reforms deal with the amount of time creditors must give consumers to pay their bills and to opt out of credit-card changes. Several additional reforms will be phased in come February and August of next year. That lengthy list includes requiring companies to apply excess payments to the highest-interest balance first and requiring the under-21 set to get a cosigner for a card.
With creditors reacting to the economic downturn by raising interest rates and adding fees, reducing credit limits and closing cards, these reforms couldn't come at a better time. But consumers still need to stay on their toes because, as always, there are exceptions to the rules. Starting Thursday, creditors must give consumers 45 days' notice before making "significant" changes to credit-card terms. Such changes include raising annual percentage rates, adding or changing any fees and revising or eliminating the grace period.
Why the new rule? Because even the most vigilant consumers may not be able to make other arrangements or get their "opt-in letter" to the credit-card company within the current 15-day time requirement. Increasing the time to 45 days gives consumers the opportunity to thoroughly explore their options.
But don't expect to receive 45 days' notice for every change to your account. One "frustrating" omission is that 45 days' notice isn't required before creditors lower your credit limit or close your cards, said Gerri Detweiler, credit adviser for Credit.com. Your card company also need not notify you when a promotional rate is expiring or if a variable rate already explained in the card's terms is changing. But she's pleased by the fact that consumers will be able to opt out of rate increases that arise from delinquency or default.
A final caution related to this rule: If you make any purchases 14 days after you've received notice of an interest-rate change, those purchases will be charged at the higher interest rate. So don't go on a charging spree thinking you're sneaking in under the wire.
Creditors will also have to notify consumers of their right to cancel the card before any change goes into effect. Cancel the card and creditors can't apply the higher rate or other changes to the existing balance in most cases.
So what do you do if your card changes terms on you?
One option is to live with the change and pay your balance off at the higher rate. Or you can opt out of the change by sending an opt-out letter and pay the existing balance off under the old terms. There's a good sample opt-out letter online at www.creditcards.com (search for "opt out"). But you might want to call your credit-card company to ask about its own opt-out procedure. If you do opt out, a warning: "Your minimum payment might go up," Detweiler said. But you should not have to pay your balance immediately in full.
You can also try to transfer your balance to a new card, although if you have troubled credit, it may be hard to find such an opportunity. Even if you have good credit, creditors are eliminating zero-percent-balance-transfer options and imposing or raising balance-transfer fees.
In the past, I've heard from readers who feel trapped into keeping a card for fear that canceling it might ruin their credit scores. Those fears may be overblown.
"Typically, it's a small impact on the credit score, and if your credit's decent, your score is probably going to bounce back (to) where it was in a couple of months," Detweiler said.
Consumers with low or no card balances likely will see little change to their credit score, said Craig Watts, spokesman for Fair, Isaac and Co. FICO provides consumer credit scoring models.
Credit users with high balances who close accounts "could inadvertently increase your overall limits-to-balances ratio, which in turn could whack your score. An important key for protecting your good FICO score is to keep balances low on all your credit-card accounts," Watts wrote in an e-mail.
Weigh a possible ding in your credit score against the financial cost of sticking with your old card and paying a higher interest rate.
Another change effective Thursday: Creditors must mail credit-card statements at least 21 days before payment is due. Why 21 days? Seven days to get the statement, seven days to pay it and seven days for the payment to arrive at the credit-card company. Currently, credit-card companies need to send statements just 14 days ahead of the due date, which can create difficulties for vacationers and workers living paycheck-to-paycheck.
Tara McCarthy, president of Minneapolis-based Financial Rehabilitation Inc., said one late payment can trigger fees and higher interest rates "and everything starts to slide out of control." Three weeks will give her clients, who often are on the financial edge, time to make a plan for paying household bills.
I hate to be a cynic, but since these changes were designed to help consumers keep more of their money, I assume that credit-card companies are working vigorously to get that money back. And don't be surprised if you receive letters outlining changes to rates and fees before the new regulations go into effect on Thursday.
(E-mail Kara McGuire at kmcguire(at)startribune.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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