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Extra2/22/2010 5:00 PM ET

The Credit CARD Act: What you need to know

Consumers have some important new protections when they use plastic. But some analysts warn that the reforms will come with unforeseen costs.


It's a new day for credit cards.

As of today, many of the rules of the credit card game have changed. New consumer protections against surprise interest-rate hikes, over-limit fees and easy credit for young people have taken effect through the Credit CARD (Credit Card Accountability, Responsibility and Disclosure) Act of 2009.

Depending on your perspective, the law is a boon for American families who will save perhaps billions by avoiding unnecessary credit card interest payments and fees, or a bust for banks that will lose billions because they'll no longer be so free to impose those charges.

The biggest consumer benefit from the new law: If you have outstanding credit card balances, the interest rates on those amounts are protected from "any time, any reason" rate hikes. Cardholders and consumer groups complained the most about this longstanding card industry practice because interest-rate hikes could be applied retroactively to purchases made earlier.

The cost of a $25 shirt purchased in 2005, for example, could balloon by virtue of an increased interest rate on a revolving account balance. The CARD Act does away with that practice.

Instead, with a few exceptions, card companies can increase rates only on future purchases with the card and only if they give consumers 45 days' warning of the rate hike and the opportunity to decline changes if they choose.

"It is a fundamental change in how credit card companies have to deal with consumers," says Kenneth J. Clayton, senior vice president and general counsel for card policy for the American Bankers Association trade group. "It's a new era in credit cards."

For years, banking-industry lobbying groups fought passage of any credit card reform legislation or other financial reform measures. But in recent months, the ABA has done an about-face and begun to embrace the new rules and promote the benefits the law will have for consumers.

The law will make having and using a credit card more predictable and give consumers more control, Clayton says: "Are their interest rates going to change on existing balances? Are they going to be surprised by some fee somewhere? No longer will they be surprised."

"If you go out and make a purchase, the interest rate on that purchase will not change going forward," says Nessa Feddis, vice president and senior counsel for the bankers group.

New law no cure-all

Is the reform law a panacea for all that ails the credit card industry? Not a chance. Although some had pushed for its inclusion, there is no national cap on how high credit card interest rates can go. Card companies are adding new products that aren't specifically banned by the new law but raise questions about fairness.

In fact, consumer groups have sounded the alarm about questionable new fees and practices that are already springing up. A Citi card that offers a reduced interest rate if the cardholder pays on time, but allows the company to raise that rate without notice if a payment is late by as little as one day, has caught the attention of at least two consumer groups for circumventing the intent of the Credit CARD Act.

"The companies have figured out a whole different set of tactics to keep gouging consumers," says Chi Chi Wu, staff attorney at the National Consumer Law Center, a nonprofit legal assistance group based in Boston. The law center and other consumer groups say the new credit card terms and products are further justification for creating a consumer financial protection agency -- a proposal that's part of the massive Wall Street reform package that has stalled in the U.S. Senate.

Pam Banks, policy counsel for Consumers Union, adds: "Consumers still need to be on the lookout for unfair practices, but this new law is a big step forward."

U.S. Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, urged consumers to watch their credit card statements and mail for changes that are coming with the new law. "Make sure credit card companies are giving you 45 days' notice if they're going to change your terms. If you don't like the new terms, shop around for a better deal and exercise your new right to opt out of the changes," Dodd said in a statement.

The reform law, signed by President Barack Obama in May 2009, is being phased in over a year. The first phase kicked in Aug. 20, 2009, when consumers began receiving at least 45 days' advance notice of changes to their accounts and gained the right to opt out of significant changes. They were also guaranteed at least 21 days to pay their monthly credit card bills.

Continued: What goes into effect today

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