Tuesday, February 17, 2009

Credit Card Rules to Change

Ever been surprised by a notice that your credit card interest just went up? Have you wondered why you seem to pay so much interest on your account balance? New rules that go into effect on July 1, 2010 will address these and other concerns. Increasing Interest Rates The new rules will require banks to disclose all interest rates that will apply to the account when you open the account. Furthermore, it prohibits increases in those rates, except in certain circumstances. The first exception is if a rate disclosed at account opening expires after a specified period of time banks, may apply an increased rate that was also disclosed at account opening. Second, banks may increase a rate due to the operation of an index. This exception would apply to variable rate accounts which are tied to an index such as the Prime Rate. Third, after the first year, banks may increase a rate for new transactions only after complying with a 45-day advance notice requirement Fourth, banks may, increase a rate if the minimum payment is received more than 30-days after the due date. Two-Cycle Billing Another part of the new rules pertains to the method of calculating the average daily balance on which the interest is charged. Banks will be prohibited from calculating interest using a method referred to as ‘two-cycle billing.” Under this method, when a consumer pays the entire account balance one month, but does not do so the following month, the bank calculates interest for the second month using the account balance for days in the previous billing cycle as well as the current cycle. In other words, you are being charged interest on a balance you have already paid. Card holders who are carrying a balance, however, are paying interest on their new purchases from the day the purchase was made. Allocation of Payments Different types of transactions such as new purchases, balance transfers, or cash advances, may carry different interest rates. When different annual percentage rates (APRs) apply to different balances on a credit card account, the bank will be required to allocate payments exceeding the minimum payment to the balance with the highest rate first or pro rata among all of the balances. Presently, it is a common practice to apply the excess payment to the lowest interest transactions first. This results in the highest interest rate transactions not being paid off until the balance on the entire account has been paid. Financing of Security Deposits and Fees The new rule also addresses concerns regarding subprime credit cards. The only option available to persons with a poor credit score or limited credit history may be a subprime credit card. These cards typically carry a much higher interest rate and come with extra fees such as an account set-up fee, a program fee, a monthly fee, and an annual fee. With a low credit limit of $250, after all the initial fees are financed, the account holder may have as little as $71 of available credit remaining. Now banks will be prohibited from financing the security deposits and fees for credit availability, such as account-opening fees or membership fees, if charges assessed during the first 12 months would exceed 50 percent of the initial credit limit. The rule also limits the security deposits and fees charged at account opening to 25 percent of the initial credit limit and requires any additional amounts (up to 50 percent) to be spread evenly over at least the next five billing cycles. http://www.credit.com/products/credit_cards/sub-prime.jsp Time to Make Payments Lastly, the new rule prohibits banks from treating a payment as late for any purpose unless the bank provides a reasonable amount of time for the consumer to make the payment. The rule provides a safe harbor for banks that send periodic statements at least 21 days prior to the payment due date. For additional information on the rules changes including those related to the truth in lending and overdraft services by lending institutions, go to the Federal Reserve Board of Governors web site at: http://www.federalreserve.gov/consumerinfo/bcreg20081218a1.pdf You will also find helpful information on credit and banking issues at the web site of the Office of the Comptroller of the Currency, U.S. Department of the Treasury: http://www.helpwithmybank.gov/index.html

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