Yesterday marked the implementation of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, which was designed to protect consumers in several ways from taking on too much debt and being charged exorbitant fees.
We’ve seen several changes happen over the past few months, including higher interest rates on credit cards and fewer 0% interest cards. Also, there have been reports that more cards will come with annual fees.
So what does all of this mean to you? What effect will this have on regular consumers? Let’s investigate several types of consumers and see which changes will affect them most:
The Student
In a Sallie Mae study, research revealed that the average undergraduate student carried $3,173 in credit card debt in 2008, with projects that the amount of credit card debt would increase in 2009.
As a response, the Credit Card Act makes it harder for students who are likely to be irresponsible with their credit line to obtain credit cards. The new law requires a co-signer for anyone under the age of 21, unless they can prove they have a job and can make payments without a co-signer.
Also, offering free gifts as a way of attracting college students to sign up for credit cards is banned within 1,000 feet of campus. Hilarious, but it actually works as I’ve seen lines form next to tables at football games where the reward is a free extremely expensive t-shirt.
Digging Out of Debt
For those who have debt and committed to getting out, there is lots of good news. In the old system, credit card issuers applied payments to the debt with the lowest interest rate, thereby increasing the total amount of interest paid over the longest possible period of time.
In the new system, the principle payment is applied to the debt with the highest interest rate. For those with balances of different interest rates, it means it will be possible to pay off the balance a little faster and with fewer interest charges.
More good news for those getting back on track is that credit card companies can only apply interest rate changes on new balances. The old system allowed them to hike up interest rates on your old balances as well, but now as long as you are not 60 days delinquent on your account, this can’t be done. So as long as you stay current, your old balances won’t be charged more.
Head In The Clouds
For those who are near their credit limits and who keep charging expenses on their card, there is good news and bad news. The bad news is that you have been paying $39 or more for each transaction that is over the limit. The good news is that credit card companies will have to get your permission to continue doing this.
If you think that $40 sweater is worth $79 (plus interest on the $39), then go ahead and opt in. But if you don’t, being cut off and having your card denied could be very embarrassing. For this group, I don’t see this as a solution, just a way of limiting just how much trouble someone can get into.
Love this post…especially the part about banning free gifts if you sign up with a bank… I read this post as I wear my FREE, awesomely fitting, UMD t-shirt from Chevy Chase… I say free because I didn’t sign up for anything, I explained my loyalty to Bank of America and Wells Fargo and just told them I’d spread the word for them… YAY free shirts :-)
@Lbergs
Haha, I love when free really means free. My only complaint is that Bank of America is a terrible bank with awful customer servie. I need to pay them a visit to demand that $25 they keep saying they’re going to give me!
@Daniel,
AMEN! Bank of America is in the Top 10 of my Bottom 10. Many people subscribe to “herd marketing”. Simply because something has a monopoly on an industry (verizon, bank of america, TOYOTA) doesn’t necessarily make it the best deal in town.
Now you’ve gotten me on a tangent, but one of the biggest compliants I have is when I ask people what makes BOA so great the replies are weak. For example, one reply is that branches are everywhere. Then I ask them how often they use the ATM vs. actually going inside. Of course, its predominantly ATM usage. So I remind them that plenty of other establishments don’t charge for usage beyond their network so you’d actually have more access outside of BOA.
Demand satisfcation – don’t bulk to their tactics and get your $25.
@FinEngr,
I try so hard, I’ve gone into the branch twice and the manager has been so nice and helpful…except she can’t get it done! I feel bad because I know it’s not her fault, but another visit is definitely necessary.
I am terribly glad that the young adult provisions were put in place. It might have prevented me from getting into debt so early if I had to have my parent’s signature.
@Paul @ FiscalGeek
It does seem like there are ways to get around it. Imagine a freshman with an hourly job. At some point he’s going to quit and no longer have that source of income. I think the provision helps, but is not the solution. The solution is educating people and making them realize what the consequences are.
@Daniel, Yeah there are always ways around it for sure. But when you are starting off with what college students value most (free crap) it’s hard to ignore. My roomate had a stack of 12 cards he signed up for to get the swag although he never used one of them. I wonder what his FICO score looked like. I would love for there to be a formal education process in secondary schools beyond how to balance your checkbook which is what we covered.
I think it is really great that with the new CARD act, credit card companies can’t give their “free” stuff away to students if they sign up for a credit card. This whole tactic was such a scam. My only problem with the new act is that it doesn’t limit interest rates. MSN wrote an article about how First Premier Bank was offering a new credit card for 79.9% APR, ridiculous!
@Little House
Ha, clearly that’s ridiculous. How could anyone possibly sign up for that???
How could someone sign up for the 79% interest – simply – it was in the small print, probably said if you don’t pay timely, etc…
I notice one issue you did not discuss. I get offers for either 0% or other very low interest rates for balance transfers. But, then on the back, it says 3% balance transfer fee. Since that rate comes right off the top, it’s probably more like 3.3% APR – on top of whatever the rate they’re advertising.
Steve
@Steve, Yah that’s silly to call it one thing when you have to pay a fee. That’s like sayings “the card has a 0% interest rate on purchases but if you don’t pay then there is a fee equal to 25% of the balance.”