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Credit Card Reform: New rules to protect you

On February 22, 2010, the Federal Reserve put a number of new laws into effect to protect consumers from unfair and deceptive credit card practices. This, in part, is due to some alarming statistics: Studies show that credit card debt in the United States reached more than $950 billion in 2009—a 25 percent increase in the past decade—and penalty fees totaled more than $20 billion.

The new rules are the most extensive changes to the credit card industry in more than three decades. Here are the highlights:

Clearer terms

Credit card companies are now required to clearly disclose due dates and times, interest calculations, as well as how long it will take to pay off your balance if you only make the minimum monthly payments. In addition, year-to-date totals for interest, fees and other charges are also displayed on statements.

Notice before interest rates hikes

You must be given 45 days notice before your credit card company raises interest rates, changes fees (e.g. annual, cash advance or late) or makes any significant changes to the terms of your credit card agreement. This notice gives you time to shop around for a better deal before the changes take place.

No interest rate increase for the first year

Your credit card company cannot increase your interest rate for the first 12 months after opening a new account unless your card has a variable interest rate tied to an index, there is an introductory rate (still this rate must be in place for at least six months), you are more than 60 days late paying your bill, or if you are in a workout agreement and don’t make payments as scheduled. Note that if your interest rate goes up after the first year, the higher rate will only apply to new charges.

Opt-in for over-the-limit transactions

If you want your credit card company to process transactions that will take you over your credit limit, you must opt-in by telling them to do so.

Protection for underage consumers

If you are under the age of 21, you cannot obtain a credit card unless you can prove you are able to make the payments, or obtain the signature of a parent or other co-signer.

Reasonable time to pay

Cardholders are allowed at least 21 days after statements are mailed to make the monthly payment.

Highest-interest balances paid first

If you have different balances and rates on the same card (e.g. regular purchases, cash advances and balance transfers), payments in excess of the minimum due must be applied toward the highest rate first. Previously, a popular practice by many credit card companies was to apply all amounts over the minimum monthly payment to the lowest-interest balances first, thereby extending the time it took to pay off higher-interest rate balances.

No more universal default

Credit issuers are no longer allowed to raise your interest rate based on payment history with other creditors.

Two-cycle billing prohibited

Computation of finance charges is based on purchases made in the current cycle rather than going back to previous billing cycles.

Want to learn more? Visit www.federalreserve.gov/creditcard for a list of interactive tools and features that will help you understand the terms and fees of credit card offers, decipher your statement, find out how long it will take to pay off balances and more.