New Credit-Card Law: What It Means For You

Credit-card reform reached a major milestone Friday when President Obama signed into law legislation that promises to put a stop to many of the card industry’s most controversial practices.

Responding to the public outcry by consumers who have seen their rates raised for no reason, credit lines cut below their existing balance or accounts closed (among other things), Congress hustled to get the Credit Card Accountability, Responsibility and Disclosure (aka CARD) Act, passed and in front of the president before his Memorial Day weekend deadline.

The swift pace is a big change from when the financial crisis exploded last fall. Back then, most attention was focused on financial market regulation and bank assets. But as SmartMoney has been reporting since the crisis began, credit-card issuers have been making significant moves that affect good customers as well as bad — with important consequences for consumer spending and the economy overall.

The credit measure Congress approved cracks down on these problems, and puts in place more consumer-friendly alternatives. (Not everything, however, is better for cardholders. For more, read “Credit-Card Traps You Still Need to Watch For.”)  Issuers must put a few into practice within 90 days, while others go into effect in early 2010. Some of the things the new law does:

• Restricts retroactive rate increases. Unless you are more than 60 days late on your account, card issuers cannot raise the rate on your existing balance. They can only raise your rate on new purchases going forward. (If you are more than 60 days late, issuers are required to revert to the lower rate after you make six months of on-time payments.)

• Provides more advance notice of rate hikes. Card issuers must notify consumers of changes at least 45 days in advance. This provision will go into effect within 90 days.

• Increases time to pay bills. Card issuers must mail out statements at least 21 days before the due date. They must also consider a payment made before 5 p.m. Eastern on the due date as on-time. Payments due on a day when the issuer is closed for business (for example, a weekend or holiday) cannot be subject to late fees.

• Applies payments to high-rate balances first. Many consumers’ accounts have different rates for different transactions -- say, some in a low-rate balance transfer and the rest in regular-rate purchases. Under the new law, they can apply their payments in excess of the monthly minimum toward the highest-rate portion of the balance first.

• Eliminates universal default. If you’re late with a payment to another company, issuers can no longer raise your rate.

• Requires an opt-in for over-limit fees. Issuers must obtain a consumer’s permission to process a transaction that would put his or her account over its limit.

• Restricts college credit. Consumers under age 18 cannot receive credit, unless they are emancipated under state law or are designated as a secondary cardholder to a parent or legal guardian’s account. College-age applicants’ account limits will be limited to 20% of their annual income or $500, whichever is greater.

In a recent interview with SmartMoney, Jared Bernstein, chief economic advisor to Vice President Biden, said legislation is needed to give consumers greater protections and a fairer deal when they choose to use credit cards. Bernstein said the economy must move away from a “bubble and bust” mentality to encourage “creditworthy people borrowing under terms that they understand, that make sense, to engage in normal economic activity.”

Banks, meanwhile, say the new legislation will limit their ability to re-price consumers’ accounts based on risk, and could tighten the credit market further.