New credit card laws taking effect Monday will protect consumers from much of the confusing language, ever-increasing interest rates, and frequent fees that have historically been the credit-card industry’s bread and butter.
But the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act isn't foolproof. Here are five steps to protect yourself from the loopholes and realize the maximum benefits of the new law:
1. Pay more than your minimum.
The new regulations mandate that credit-card companies must apply customers' payments to the charges with the highest interest rates first. This will help consumers pay down their balances faster and with lower interest charges.
But that protection only applies to payments made over the minimum payment due. Credit-card companies are still allowed to take the amount of your minimum required payment and apply that just to interest charges or charges with the lowest interest rates first. To realize the full benefit of this reform, cardholders must make payments over their minimums.
2. Look out for changes in the coming months.
In response to the CARD reforms, credit-card companies will be experimenting with new revenue streams to make up for the old ones lost through regulation.
“The credit card companies have had to completely redesign their business models,” says Nessa Feddis, vice president and senior counsel of the American Bankers Association (ABA). “At the end of the day, revenue has to exceed expenses – it’s basic economic theory.”
This means consumers could see new or increased annual fees, inactivity fees, or balance transfer fees, among others. In fact, credit card issuers have established or expanded the use of at least eight hidden charges across more than 400 million accounts, according to a recent report by the Center for Responsible Lending.
3. Read your mail.
The benefit of the new reforms means that credit card companies have to notify consumers about changes to their accounts well ahead of their implementation.
It may sound obvious, but cardholders will only reap the benefits of that increased transparency if they actually read those notifications.
“People should be watching their mail and reading what issurers are sending them,” says Nick Bourke, manager of the Pew Charitable Trusts’ Safe Credit Cards Project.
4. Opt out of new changes.
Closely monitoring statements and notifications from credit-card issuers will help consumers take advantage of another new feature of the credit reform – opting out of major changes to their account.
If a credit-card company wants to raise the interest rates or propose an annual fee, for example, consumers will be able to say, “No thank you.”
In response, credit card companies might decide to close the account, giving borrowers adequate time to pay off any outstanding balances under their current terms. But alternatively, if the company considers the borrower to be a good customer, it may just keep the account as is.
The point is that customers will have a choice.
5. Vote with your credit card.
Each credit-card purchase is essentially a vote.
“There’s still a lot of competition” among card issuers, says the ABA’s Mr. Feddis. And many companies have responded to consumers’ frustrations and the new regulations by issuing simpler products or tools that will help customers budget.
With that in mind, consumers should research whether their current card is truly their best option.
“There will experimentation and innovation, but at end of the day consumers have control,” says Feddis.
But credit-card issuers are also facing an important choice, says The Pew Trusts’ Mr. Bourke. As they experiment with new credit products, “each issuer has a choice with what they’re going to provide going forward.” They can either choose to incorporate the CARD Act’s spirit of transparency into their new products or develop more hidden fees and confusing terms to replace the old ones.