Consumers will face new realities under the provisions of the Credit Card Accountability, Responsibility and Disclosure, or CARD Act , which was signed into law May 22, 2009. Two provisions went into effect that August, while most will take hold Feb. 22, 2010. A final phase rolls out next August.
Here are a few tips for navigating key loopholes and protections in the new law.
Beware the advance notification exceptions. On Aug. 20, 2009, a provision that required 45 days' advance notification of "significant" terms changes took effect. It applies to fees and finance charges, as well as some rate increases. Loopholes in the law leave consumers unprotected in some situations.
For instance, the law doesn't require 45 days' advance notification for credit limit decreases. Consumers must keep abreast of their card limits each month. A silver lining: As of Feb. 22, consumers can't be zapped with overlimit fees for breaching a new, lower limit unless they have opted in to allow overlimit transactions.
1. Navigating loopholes
Issuers also don't have to provide 45 days' advance notice of rate hikes triggered by a 60-day late payment, expiration of a promotional rate, termination or completion of a workout agreement, or shifts in a variable-indexed interest rate. If you have a variable APR, for example, your rate can ride increases in the index to which it is tied, such as the prime rate as published in The Wall Street Journal.
Consult your card agreement to find out how your rate is calculated. Read notices from your issuers, and verify the rate and credit limit each month when you get your monthly statement, especially before making a large purchase. Going near your credit limit can hammer your credit score.
Required advance notices must include an opt-out clause. Consider whether it makes sense to opt out if you dislike the proposed change. Opting out will close the account but ensures a "beneficial" repayment plan.
2. Don't fall into retroactive rate-hike loopholes.
Come Feb. 22, existing balances will be protected in most circumstances from a rate increase. If you miss the due date by two months or more, however, the APR applied to that debt can skyrocket. Owe a balance after a promotional rate expires and your rate can increase up to the regular APR. If you hold variable-rate cards, your rate will inch up with upticks in the index. The prime rate is the index for most variable-rate credit cards.
You can't control the index if you have a variable-rate card, but you can make sure your payment arrives on time. Issuers now have to keep the same due date every month and send statements at least 21 days before the bill is due. They also can't charge a fee to pay by phone, Internet, mail or any other means, except to expedite a payment through a service representative. Use whatever method you find convenient to pay bills in a timely manner. Late fees ranged from $15 to $39 in a 2009 survey by Consumer Action, a San Francisco-based consumer advocacy group, which included 39 cards from 22 financial institutions.
Also make sure you know when a promotional rate ends, and plan monthly payments so that the debt is paid off before the regular APR applies. Promotional rates must last at least six months under the CARD Act.
3. Weigh the pros and cons of opting out.
Along with any required advance notice of a change in terms, issuers must include an opt-out disclosure. Opting out closes the account, but can't constitute a default of the account or require immediate repayment of the balance. In fact, issuers must provide a repayment method "no less beneficial" than either a payment plan that spans at least five years, or a new minimum payment percentage that is no more than twice the previous percentage.
Opt out if you can afford a possible score hit from the account closure, but not the new fee or interest rate. Learn how account closures can disclosures can ding your credit score.
4. Permission needed to go overlimit.
Under the CARD Act, a purchase that exceeds the credit limit can't trigger an overlimit fee unless the cardholder has opted in to allow overlimit transactions.
The consumer must be informed of the overlimit fee they will incur if they surpass their account limit. Consenting consumers can only incur one overlimit fee per billing cycle during which their balance breaches the limit.
The only reason to opt in to overlimit transactions is if you know your balance will exceed the limit and want to ensure that the charge goes through. The law doesn't prohibit approval of overlimit charges when the customer hasn't given permission for them, but does leave room for denial.
If you need to go overlimit for whatever reason, you can switch on your overlimit privileges at any time, by making the request in writing, orally or over the Internet.
5. Watch for annual fees.As the law was debated and passed, some experts speculated that annual fees could return. So far, their reappearance has been slow. The volume of mailed credit card offers carrying annual fees increased to 28 percent in the second quarter of 2009, up 1 percentage point since the first three months of the year, according to Synovate Mail Monitor, a global market research firm. In addition, only eight out of 39 credit cards in the Consumer Action study charged annual fees.
Consumers shouldn't take any comfort from the lack of annual fees. Issuers only have to provide 45 days' advance notice before implementing an annual fee.
When shopping for a new card, avoid annual fees if possible. For rewards cards with annual fees, first do the math to see if the benefits offset the fee, based on your typical monthly spending.