New Credit Card Rules Approved!

credit cards This morning, the Office of Thrifty Supervision (yes this is a real Government Office! It’s a division of the Treasury Department), announced that it has finalized new changes that will protect consumers from a variety of questionable credit card practices. This is fantastic news for consumers! Let’s dig in and look at some of the official documents released today.

Breaking down the rule changes

1. Interest rate changes. The first HUGE change offers protection against arbitrary rate increases. “Savings associations”, as the Office of Thrifty Supervision calls them, are required to disclose, at account opening, the annual percentage rates (APRs) that will apply to the account and prohibits savings associations from increasing APRs unless expressly permitted. This doesn’t mean that they can’t raise your rate, they can. It means that they can’t raise your rate without explicitly telling you when you open the account that the rate will increase.

Once your account has been open for a year, they may increase the rate for new transactions by providing a 45-day advance notice. They may also increase a variable rate due to the operation of an index – meaning that if your rate is variable it will fluctuate as the index increases or decreases in value. That’s something that hasn’t changed.

Finally, they may increase a rate on existing balances when the consumer is more than 30 days delinquent in paying the credit card bill.

2. Reasonable time to pay. New rules also prohibit savings associations from treating a payment as late unless the consumer has been provided a reasonable amount of time to make the payment. In this case they classify a reasonable amount of time as 21 days.

3. Payment allocation. This one is a big change, and I can’t wait to see the benefits of this in action. When you have an account balances that has different APRs, for example you have standard transactions at 15% and a balance transfer at 0%, the typical practice has been for the credit card company to apply your payments against the lowest interest rate first. This costs you money, plain and simple. You’re stuck paying the 15% interest rate while the 0% balance gets paid off first.

The new rules give you two options. They require the credit card company to allocate any amount paid in over the minimum payment to either the highest interest balance or evenly divided among all balances. It’s your choice. It’s not clear how you will specify which your preferred method of allocation is, but I suspect that by the time the rules go into effect it will be well publicized how to make this distinction.

4. Double-cycle billing. Credit card companies are also prohibited from using the practice often referred to as “two-cycle billing”. This is when they impose a finance charge based on balances associated with previous billing cycles.

5. High-fee sub-prime cards. Companies are also prohibited from charging fees for issuing credit that consumes the majority of the available credit during the first year your open your account. Fees over 25% of your credit limit must be spread over a minimum of the first six months that the account is open, rather than charged as a lump sum during the first billing cycle. I wasn’t aware of this practice, but certainly spreading this type of fee over time makes it easier to manage, and you won’t have to pay interest on a large lump sum right off the bat.

6. Exceeding your credit limit. Companies are restricted from placing “too-high” fees for exceeding the credit limit solely because of a hold placed on the account. At first pass, I didn’t see any mention of what exactly “too-high” was defined as.

The fine print

This sounds pretty good right? So when does this go into effect? While the Office of Thrifty Supervision(man I love that name!) requires companies to comply by July 1, 2010, they’re urging companies to put these practices into effect sooner. July 2010, is a long time from now, especially if you’re focused on paying down debt. But hopefully credit card companies will see the marketing value of getting out in front of this and we’ll see a few of them put these practices into effect sooner, so that they can claim they care about the customer.

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photo credit: TheTruthAbout…