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Credit Card Rules

Beginning February 22, 2010, many new credit card rules were implemented at financial institutions. In this course, we take a look at the most important of these rules.

Notification

The credit card rules provide direction to card issuers about notifying cardholders in the following two areas:

  • 45 Days’ Notice
  • Paying Off a Balance

Let’s take a closer look at each of these areas.

45 Days’ Notice

A card issuer must give a cardholder 45 days’ notice if any of the following changes are made to their credit cards:

  • Interest rate increase.
  • Change in fees, such as annual fees, late fees, over-the-limit fees, and cash advance fees.
  • Any other significant changes to the terms of the credit card.

45 Days’ Notice Exceptions

A card issuer does not have to provide a 45 days’ change notice in the following instances:

  • If your credit card has a variable rate and is tied to an index that is not controlled by the card issuer.
  • The introductory rate on your card expires and the rate reverts to the previously disclosed “go-to” rate.
  • You have not complied with a workout plan and made regular payments as scheduled with the card issuer.

“Opt-Out” Rule

Card issuers must allow you to “opt out” or cancel your card prior to any significant changes taking place on your credit card. The catch here is that card issuers can implement new interest rates and other significant changes to the card beginning 14 days after the change notice is sent to you. Furthermore, your ability to reject changes does not apply to any “transactions” that occur more than 14 days after the 45-day notice is sent; in other words, transactions made between days 15 and 45.

So, if you “opt out,” you must not use your card. If you use your card after you “opt out” and prior to the change taking place (between days 15 and 45), you will be charged the new term, fee or rate on the transactions that you made during that time.

Exceptions to the “Opt-Out” Rule

There are two exceptions to the “opt-out” rule for cardholders:

  • You cannot opt out of increases in minimum payment amounts because it is believed that paying higher minimum payments will help you in the long run (not have to pay as much in interest).
  • You cannot opt out of changes if you are more than 60 days late making your payments.

Balance Payment Options for ‘Opt Out”

If you “opt out” of your card, your card issuer may not require you to pay your balance in full or report it as delinquent; however, you may be required to pay off your balance in one of the following ways:

  • Collect the balance over at least five years;
  • Charge a minimum payment amount that is up to twice the percentage charged before the change in terms; or
  • Use the same repayment plan used at the time of the “opt out.”

Paying Off a Balance

Credit card rules require card issuers to supply you with certain information about paying off your balance in your monthly credit card statement. The following information must be included in your monthly credit card statement:

  • The amount of time it will take to pay off your balance in full if you only make the minimum monthly payments.
  • The total amount you will pay, including interest, if you only make the minimum monthly payments on the card.
  • How much you will have to pay each month in order to pay off the total balance in 36 months.
  • The dates by which payments must be received to avoid late penalties.
  • The date the late fees will be charged to the credit card.

Additionally, card issuers must provide a notice that states that if you only make the minimum payments, it may take you longer to pay off the debt in full, as well as the amount of interest you will pay. Card issuers must also establish toll-free numbers for consumers and account holders to obtain information about non-profit credit counseling and debt management assistance.

Let’s take a look at how all of this information may look on a typical statement. In the following example, the individual owes $3,000 and has an interest rate of 14.4%:

Source: Federal Reserve

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Rates, Fees and Limits

The credit card rules provide specific instruction to card issuers in how they can charge rates and fees as well as determine the limits of the credit card. There are three critical provisions that may affect you if you own a credit card:

  • Interest Rate Increases
  • Caps on High-Fee Credit Cards
  • Restrictions on Over-the Limit Transactions

Let’s take a closer look at each of these areas.

Interest Rate Increases

A card issuer cannot increase the interest rate on your credit card for the first 12 months after you open it. The following are the exceptions to this rule:

  • If your card carries a variable rate and is tied to an index, it must change when the index changes. Some variable-rate cards are tied to an index and must change whenever the index changes. For example, many financial institutions use the prime rate as an index for a variable-rate credit card, plus a certain percentage (e.g., prime + 10.99%). So, when the prime rate increases, the rate must increase as well.
  • If there is an introductory rate on your credit card, the rate will automatically revert to the “go-to” rate previously disclosed when you got the card. It is important to note that the credit card rules require an introductory rate to be in place on a credit card for at least six months. After that, the rate will revert to the previously disclosed rate.
  • If you are more than 60 days late making a payment on your credit card, the card issuer can increase your rate. Because you have not kept your end of the bargain, the card issuer has the right to revoke former rate privileges. However, it is important to point out that after six months at this increased rate, card issuers are required to review the account again to see if the rate can be reverted.
  • If you are in a workout agreement with your card issuer and you do not make your payments as agreed, your rate can be increased. If you do not want to have your credit card rate increased, be sure to make all payments on time per your schedule.

Additionally, if your card issuer raises your credit card rate after the first year, the new rate will apply only to new charges you make. If you have a balance, your old interest rate will apply to that balance.

Caps on High-Fee Credit Cards

These credit card rules state that if you are charged a fee (e.g., annual fee or application fee) on your card, those fees “cannot total more than 25 percent of your initial credit limit.” For example, if you have a credit limit on your credit card of $1,000, the fees during the first year you have your card cannot be more than $250.

Restrictions on Over-the-Limit Transactions

The rules require you to let your card issuer know it can charge you a fee for going over your credit limit. If you do not “opt in” to over-the-limit fees, your card issuer cannot charge a fee to do so, but your transaction may be denied because it will take you over your credit limit.

If you choose to “opt-in” for this fee, your card issuer must inform you of the amount of the fee and that you have the right to revoke this option at any time. Moreover, over-the-limit fees must only be charged once during a billing cycle.

Here is how it works:

Let’s say you have a credit card with a limit of $10,000. You purchase some furniture that takes your credit balance to $10,100, which is $100 over your credit limit. If you have opted in to the over-the-limit fee, your card issuer has the option to accept the transaction and charge you a fee because they have taken you over your credit limit. However, if you have not opted in to the over-the-limit fee, your card issuer will not be able to accept the transaction, and it will be returned. You will not be charged an over-the-limit fee, but you will more than likely be charged a non-sufficient funds fee as well as any returned item fees associated with the transaction.

Over-the-Limit Fees

Please remember, though, that whether or not you opt in to the over-the-limit fees, your card issuer still has the right to deny any transaction that takes you over your credit limit. Counting on the over-the-limit fee to help you make a purchase may not be the best way to manage your credit nor your budget; it is strictly something to consider for emergency purposes only.

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Billing and Payments

These rules outline specific ways your card issuer must deal with the billing and payment of your credit card. The following are the key areas affected by the changes:

  • Statement Mailing and Due Dates
  • Prompt Credit of Payment
  • Repayment and Billing Structure
  • Payment Preference

Let’s take a closer look at each of these areas.

Statement Mailing and Due Dates

You must receive your monthly credit card statement at least 21 days prior to the due date. Furthermore, if your credit card has a grace period, the finance charges for the month cannot be assessed unless you receive the monthly statement at least 21 days before finance charges are to begin.

Your due date should be on the same date each month. For example, your payment is always due on the 15th of each month. It cannot be due the 15th of January and the 1st of February. Furthermore, if your payment due date falls on a weekend or holiday (when your card issuer does not process payments), you will have until the following business day to pay the balance. For example, if the due date for your credit card bill in January falls on Sunday, you will have until the following Monday before 5 p.m. to make your payment and be considered “on time.”

Prompt Credit of Payment

The credit card rules also require the prompt credit to your credit card if the payment is received by 5 p.m. on the due date (it cannot be considered late). Furthermore, the date in which a payment is made at a branch or a financial institution must be considered as the payment date as long as it is made prior to 5 p.m.

The only exception to this rule is when you request an expedited payment on your credit card, such as a last minute payment to avoid late fees.

Repayment and Billing Structure

If you make a payment to your credit card that is higher than the minimum balance due, the amount exceeding the payment must be applied to balances with the highest interest rate first.

If you made a purchase under a “deferred interest program,” your card issuer may let you choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, your payment must be applied to the deferred interest rate balance first.

Additionally, a card issuer is now prohibited from the use of “double-cycle billing.” In other words, a card issuer can only impose interest charges on balances in the current billing cycle. The only exception is when there is an adjustment made due to a disputed purchase, or because a payment was returned for insufficient funds.

Payment Preference

Credit card issuers may not charge you with additional fees based on how you choose to repay the balance on your credit card. For example, they cannot charge you a $3 fee if you choose to pay our credit card bill through the online banking services and a different fee (or no fee) if you make the payment in person.

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Gift Cards

The credit card rules state that prepaid cards, gift cards and gift certificates cannot expire within five years of activation or unless the terms of the expiration are clearly disclosed. The law also bans dormancy fees, inactivity fees, or service fees on gift cards unless there has been no activity in a 12-month period and the issuer clearly discloses all fees before the card is purchased. Moreover, fees are limited to one per month.

The following are types of cards that are excluded from these rules:

  • Prepaid phone cards
  • Reloadable cards
  • Loyalty or reward cards
  • Cards issued for special events or venues (e.g., theme parks)

Gift certificates issued in paper form are exempt from any expiration provisions.

Young Consumer Protection

The credit card rules place strict limitations on marketing and issuing credit cards to consumers younger than 21 years of age. In fact, the rules ban credit cards for individuals under the age of 21 unless:

  • They have adult co-signers; or
  • They can show proof they have the means to repay the debts.

Other Youth Regulations

Additionally, prescreened credit card offers are prohibited from being sent to consumers under the age of 21. Moreover, anyone younger than 21 must get permission from their parents, guardians or spouses to increase credit limits on joint accounts they hold with them.

The credit card rules also ban offers of freebies (e.g., pizza, t-shirts, etc.) if students sign up for credit cards on or near campus or at college-sponsored events. In fact, the Federal Reserve Board issued guidelines defining “near” campus as anything within 1,000 feet of the campus border.

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