Credit Card Base

Today, the long-awaited and long-needed changes laid down by the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act go into effect.  When the bill was passed last May, it was the first meaningful credit card legislation that had ever been passed on the federal level.

The Credit CARD Act allows for a new level of oversight and regulation that will end some of the worst abuses committed by credit card companies.  We’ve updated all of our credit card resource pages to reflect the way this bill changes things for consumers.

While the Credit CARD Act is a huge step in the right direction, credit card companies are already hard at work finding new ways to get around the rules.  It ends some of the worst abuses, but does nothing to deal with others like usurious interest rates, over-the-limit fees, and other deceptive interest rate increases.

That’s why we’re fighting for the creation of a Consumer Financial Protection Agency (CFPA).  No matter how many regulations Congress passes, the banks will always be looking for loopholes they can exploit in order to make more money, and Congress will never be able to respond quickly enough to completely protect consumers.  We need an agency dedicated entirely to making sure banks aren’t selling bad practices and products; we need a CFPA.

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When the new credit card rules go into effect on February 22 (Credit Card Bill of Rights), perhaps one of the most exciting changes will be the way payments are allocated.

In the past, credit card issuers applied payments over the minimum payment to balances with the lowest APR because it worked in their favor.

Let’s look at an example:

Total credit card balance: $5,000
Purchase balance: $3,000 @ 18% APR
Balance transfer balance: $1,500 @ 0% APR
Cash advance balance: $500 @ 20% APR

In the scenario above, credit card issuers would apply any extra payments to the balance transfer balance set at 0% APR.

That would leave the balances subject to the highest APR and associated finance charges intact, costing you more money.

It wouldn’t be until that $1,500 balance transfer balance was paid off before the purchase balance and finally the cash advance balance would be paid down.

The practice meant big money for credit card issuers, and never-ending debt for struggling card holders.

Fortunately, lawmakers said enough was enough, and stamped out the negative payment hierarchy.

Going forward, the reverse will be true when you make more than the minimum payment.

So in the above example, any extra payment(s) will attack the cash advance balance first because it has the highest APR, and thus the most finance charges.

The last balance to be paid down will be the balance transfer set at 0% APR, which benefits card holders because it’s not accruing any interest (at least during the promotional period).

The rule change is good news for card holders looking to pay down debt; of course, it should have always been this way, but better late than never.

In a few weeks, it will be a lot more difficult to get a credit card if you’re under the age of 21, at least, that’s the plan.

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit Card Bill of Rights) will go into effect on February 22, and bring with it a number of changes, which I previously wrote about.

But another issue at hand is extending credit to so-called underage consumers, namely those under the tender age of 21.

The impending legislation will require that those under 21 who apply for a credit card either get a co-signer aged 21 or over, or document the ability to repay the credit card debt.

If the under 21 applicant chooses option one, that co-signer will be on the hook for any unpaid debt; if they choose to document income, it’ll probably be rather cumbersome, and certainly not the instant approval we’ve all grown so fond of.

Additionally, if under 21, a credit line increase will only be permitted on a joint account with the co-signer’s permission.

In other words, kids can’t go increasing their card limit without their parent’s knowledge.

So it’s going to be more difficult to get a credit card if you’re under 21, which in one respect, will be a good thing.

But what about those who need the credit, are generally responsible, but unable to get a co-signer or document income?

Will it lead to an increase in the use of prepaid credit cards, or an increase in personal loans, those with much less favorable terms than credit cards?

I hope all the implications have been considered for the sweeping changes, especially since credit cards are often a young consumer’s initial credit building tool (how to build credit).