The Truth About Credit Cards

You can use the fanciest computers to gather the numbers, but in the end you have to set a timetable and act.

– Lee Iacocca

How was your Memorial Day Weekend? Mine was pleasant…and, of course, sobering. With all of the news flying around this week (North Korea, budget showdowns, economic fear, etc.), it’s tempting to see our current troubles as the *worst* we’ve ever faced.

Our veterans have faced much worse–and prevailed.

The “Greatest Generation”, during WWII, had meat on a weekly basis, sugar monthly, and faced a level of sacrifice we haven’t had to even think about. So it’s right that we paused to consider the sacrifice of so many men and women who went without so much–so that we could live the lives we have now.

It’s a good reminder, during these turbulent times. Let’s not give up, in the face of our own fights.

Moving on… I wanted to weigh in this week, on the recent passage of the “Credit Card Accountability Responsibility and Disclosure Act (CARD)” (2009). There’s been a fair amount of commentary in the media about it, but little about how it will affect YOU. I aim to fix that in this week’s Strategy Note. I’m gonna go through the main parts of the bill, and break it down–what it REALLY means for you…and what I think of it all.

Enjoy…and leave feedback in my blog!

<strong>”Real World” Personal Strategy</strong>

<strong>”After Action” Report: CARD Act</strong>

Now that President Obama has signed into law this bill, it will mean some pretty significant changes, and I break these down–“Real World” style!

Here’s a summary of the major elements of the bill…and my “vote” on it (even though I’m not in Congress)!

APR Changes on Your Existing Balances: Credit card companies will no longer be allowed to raise interest rates on your existing credit card balance unless you are more than 60 days behind on your payments to them. If you get an APR hike because you were 60 days late, you will be able to get back your original rate, by making payments on time for 6 months in a row.

    * MY VOTE: As a planner, I love it! As long as you keep up with your payments, you will not face any surprise rate hikes. In other words, the bill allows you to plan ahead.

    * IMPACT ON YOUR WALLET: Credit cards will have higher interest rates and lower credit lines than they have now. In addition, you will see fewer 0% offers (especially on balance transfers) and all credit cards will have variable rates that will fluctuate up and down based on the Prime Rate. However, and most importantly, your credit card terms will not have any surprises.

APR Changes on New Balances:  Credit card companies will be required to give 45-days notice before increasing the interest rates. Increases made won’t affect your existing credit card balance–it will only affect the credit card balance that you accumulate 45 days after receiving the notice.

    * MY VOTE: Again, I like it. Allows you to plan ahead.

    * IMPACT ON YOUR WALLET: No direct impact.

Restricted Availability, for those under 21:  Credit card companies will be prohibited from issuing cards to consumers who are under 21, unless the application is co-signed by a parent, or guardian or proof of ability to repay the debt can be supplied.

    * MY VOTE: In my view, this is a bit much. You are capable at 18 years old to drive, go to war, carry a gun, vote, but you are not allowed to make the decision to get a credit card? This seems to verge on over-protection.

    * IMPACT ON YOUR WALLET: It will take longer to build up credit, because fewer people will be able to start the process when they are 18 years old.

Prohibits “Over Limit” Fees:  Unless you express to your lender your desire to go over your credit limit, you will not be allowed to go over, and therefore you will not be assessed any “over limit” fees.

    * MY VOTE: Love it! It’s hard to defend charging you a fee for something that they allowed you to do and that you did not ask for. Now, wouldn’t it be great to eliminate overdraft fees from debit cards?

    * IMPACT ON YOUR WALLET: If you have Fair Credit or Bad Credit, expect big increases to the membership fees.

Fair Payment Allocation:  You may have a balance transfer on your card at one rate, while your purchases accrue interest at a higher rate. Before this legislation, credit card companies applied your payment to the balance with the lowest interest rate first, so that your balance with the higher interest rate would keep racking up interest. Now, payments must first be applied to the balance with the highest interest rate.

    * MY VOTE: I love it! It made no sense that consumers could not pay down their most expensive debt, without first paying down all the other debt on their credit card.

    * IMPACT ON YOUR WALLET: Credit cards will have higher interest rates and there will be fewer 0% Balance Transfer Credit Cards, if any.

Prohibits “Universal Default”:  Credit card companies will be prohibited from raising your interest rates due to late payments or defaults on other credit cards, loans or bills.

    * MY VOTE: A very welcome addition. This was a highly confusing and deceptive practice. For example, I might not pay a medical bill because I am disputing it.  So, why should my credit card rate go up?

    * IMPACT ON YOUR WALLET: No direct impact. Only a handful of the major issuers were using “Universal Default,” and they will now have to play by the same rules – just like everyone else.

No More “Payment Fees” for different payment methods: The legislation prevents companies from issuing a charge for paying a bill by phone or online.

    * MY VOTE: Again, I love it. It is hard to defend “increasing” the payment when you want to make a payment.

    * IMPACT ON YOUR WALLET: No direct impact to the credit card terms. It just won’t cost anything to avoid late fees.

Prohibits “Double Cycle” Billing: Credit card companies will be prohibited from calculating finance charges based on the previous month’s balance.

    * MY VOTE: I like it. This was a highly confusing and deceptive practice.

    * IMPACT ON YOUR WALLET: No direct impact since almost all of the major issuers had stopped using this practice. Discover might be the only major credit card company using it, and thus Discover cardholders that alternated from paying their balance in full on one month to not paying it in full the next month might get fewer finance charges assessed.

In short, this new law will significantly change the way credit card companies conduct business.  In the short term, though, consumers will see smaller credit lines, higher interest rates, higher membership fees and fewer 0% offers.  Rewards offers will likely stay the same.

While the effects of the legislation may seem restrictive at first, I strongly believe that the long term effects will result in a net benefit for consumers. This eliminates “gotcha” rate hikes and fees and will allow consumers to plan the selection and management of personal credit lines, without the worry of unforeseen surprises popping up along the road.

And that’s a good thing…and it’s now, the “Real World”.

<em>To more of your money in your wallet!</em>

R MendenThe Truth About Credit Cards