Fasten your seat belts, credit card holders. It's going to be a bumpy few months.
When President Barack Obama signed credit card reforms into law recently, bankers shook their fists and warned us we'd be sorry. Though some of their threats are so much hot air, the new legislation will force some dramatic and often unwelcome changes.
Who's most at risk? Anyone who carries credit card debt, and that includes those of you with great FICO credit scores.
Who's least at risk? Big spenders with good credit scores who don't carry balances.
"Brace yourselves. For the next nine months, until this law takes effect, issuers will do more of the same: raising interest rates, pushing through new and higher fees, and continuing to scale back credit limits," said Greg McBride, a senior financial analyst at Bankrate.com. "Everybody, including those with very good credit, will have to get accustomed to lower credit limits, higher rates and higher fees as a result."
Read on for how the landscape will change and how you can best cope.
First, a little history: After years of offering cards to virtually everyone, including toddlers and dogs, issuers started overhauling their practices early last year as the recession took hold. (Read my column "The credit card party is officially over" from February 2008 to see how it all began.) Rate increases, account closures and credit limit cuts became more widespread as delinquencies started to spike and as issuers lost access to the securitization market that had provided them with so much cash.
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Before the credit crisis, you see, issuers could bundle up your credit card debt and sell it in slices to investors, raising money the card companies could use to extend even more credit.
Once investors became allergic to risk, though, that easy source of funds dried up, and issuers reeled back some of the credit lines they'd proffered in better days. (One prominent banking analyst estimates issuers will cut overall limits by more than half before the end of 2010.)
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Issuers are also making cards harder to get. The deluge of credit card offers that once swamped your mailbox has slowed to a trickle, and the majority of card companies tell the Federal Reserve they've tightened lending criteria by, for example, requiring higher credit scores.
Suddenly, the consumer matters
Meanwhile, the Fed woke up after a long slumber and noticed that some of the issuers' practices weren't exactly fair to their customers. Stuff like:- Hiding fees.
- Raising rates on existing balances for any reason or no reason.
- Jacking up rates because you missed a payment on an unrelated bill.
- Applying payments first to balances with the lowest rate so the higher-rate charges would accrue interest longer.
- Charging interest even in months when a customer didn't carry a balance, a practice known as double-cycle billing.
So the Fed and other banking regulators banned these practices but postponed implementation of the changes until July 2010. That, of course, gave issuers a running start so they could jack up rates, cut limits and impose fees even more furiously.
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The new credit card landscapeCNBC's Bertha Combs looks at the shockwaves the new rules will send through the card industry.
Which issuers did. That, in turn, fed a groundswell of public indignation that led lawmakers to impose even stricter reforms by lopsided votes in the House and Senate. For example:
- Interest-rate increases will be permitted only under a few conditions, including when a promotional rate ends or when a cardholder is 60 days late with a payment. Issuers won't be able to raise rates for a year after granting a customer a card.
- Instead of allocating payments proportionately among balances with different interest rates, issuers will have to apply payments to the highest-rate balance first.
- Issuers will have to give 45 days' notice of any significant changes in your card agreement, up from today's 15-day notice, which will give you more time to shop for an alternative.
- "Gotcha" fees for late payments will be harder to impose. Cardholders must be given at least 21 days to pay a bill after the statement closing date. Any payment received by 5 p.m. on the due date will be considered on time. Issuers will no longer be able to assess a late fee if a payment is received on a due date that falls on a day when the issuer is closed, such as a weekend or a holiday.
- Cardholders must agree before issuers can approve over-limit transactions and impose fees.
- Applicants under 21 must prove they have independent income or get a co-signer before they can open a credit card account.
- Issuers can no longer lard subprime credit card offers with upfront fees. Such fees would be limited to 25% of the credit limit.
Like the Fed, though, lawmakers gave card issuers some time before the changes go into effect. So credit card companies have until next February to get their licks in.
And they will.
"Those (cardholders) who are revolving balances, even those with good credit, are going to suffer," predicted CardRatings.com's Curtis Arnold. "There's probably never been a worse time to have credit card debt."
Continued: Your credit card future
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