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What the New Credit Card Law Means for You

by Connie Prater

Now that lawmakers are close to finalizing federal laws to protect millions of consumers who rely on credit cards, it signals a new era of managing credit.

The new normal for credit cards may be more transparent and easier to understand for everyday Americans. Credit card issuers and credit industry analysts say the new law will make credit cards more costly for all users and unaccessible for low-income families. Look for the return of routine annual fees, fewer rewards cards and the possibility that credit card bills will be payable immediately rather than after a month-long grace period.

The New Normal

With the passage of a bill Tuesday by the Senate, it assures that a new law containing the most far-reaching changes to the credit card industry in decades will be enacted. The House passed a similar bill in April, and President Barack Obama has indicated strong support for credit card reform. While the bills differ in many details, and will have to be reconciled before reaching the president's desk, they agree in their broad outlines.

What will the credit card law mean for cardholders? Millions of credit card users will avoid retroactive interest rate increases on existing card balances and have more time to pay their monthly bills, greater advance notice of changes in credit card terms and fewer penalty fees, late charges and interest payments. Once in effect, the law will also fundamentally change the way credit card issuers market, bill and advertise credit cards.

Here are the highlights of the proposed law:

Limited interest rate hikes: Interest rate hikes on existing balances would be allowed only under limited conditions, such as when a promotional rate ends, there is a variable rate or if the cardholder makes a late payment. Interest rates on new transactions can increase only after the first year. Significant changes in terms on accounts cannot occur without 45 days' advance notice of the change.

At a glance: Proposed credit card law

What's happening: The U.S. Senate has approved the toughest credit card restrictions in its history. If signed by President Obama, portions of the law could take effect starting in the fall with most protections starting nine months after enactment.

Why it's important: A new federal credit card law will tilt the playing field toward consumers by removing some of the credit card industry's most profitable and punitive practices. Consumer advocates favor it. Card issuers warn it will drive up the price of and limit the availability of credit cards at a time when the country needs more spending to stimulate the economy.

What's next: The House and Senate versions of the bill must be reconciled. The final version could be signed into law by President Obama by the end of May.

No more universal default: "Universal default," the practice of raising interest rates on customers based on their payment records with other unrelated credit issuers (such as utility companies and other creditors), would end. 

More time to pay monthly bills: Credit card issuers would have to give card account holders "a reasonable amount of time" to make payments on monthly bills. That means payments would be due at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or are moved up, giving them less time to pay their bills and increasing the likelihood of late fees.

Clearer due dates and times: Credit card issuers would no longer be able to set early morning or other arbitrary deadlines for payments. Cut-off times set before 5 p.m. on the payment due dates would be illegal under the new law. Payments due at those times or on weekends, holidays or when the card issuer is closed for business will not be subject to late fees.

Highest interest balances paid first: When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first. Current industry practice is to apply all amounts over the minimum monthly payments to the lowest-interest balances first -- thus extending the time it takes to pay off higher-interest rate balances.

Limits on over-limit fees: Consumers must "opt in" to over-limit fees. Those who opt out would have their transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees charged for going over the limit must be reasonable.

No more double-cycle billing: Finance charges on outstanding credit card balances would be computed based on purchases made in the current cycle rather than going back to the previous billing cycle to calculate interest charges. So-called two-cyle or double-cycle billing hurts consumers who pay off their balances, because they are hit with finance charges from the previous cycle even though they have paid the bill in full.

Subprime credit cards for people with bad credit: People who get subprime credit cards and are charged account-opening fees that eat up their available balances would get some relief under the new law. These upfront fees cannot exceed 25 percent of the available credit limit in the first year of the card.

Minimum payments: Credit card issuers must disclose to cardholders the consequences of making only minimum payments each month, namely how long it would take to pay off the entire balance if users only made the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they want to pay off their balances with 12, 24 or 36 months, including the amount of interest.

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