By Sam Baker, KERA Morning Edition Host
http://stream.publicbroadcasting.net/production/mp3/kera/local-kera-886188.mp3
Dallas, TX –
A second round of consumer protections under the Credit CARD Reform Act of 2009 took effect Feb. 22. They include more disclosure about the terms of your card and when and how card companies can adjust your rates. But it's now even more important for cardholders to become diligent in protecting themselves. KERA's Sam Baker talked with Todd Mark of Consumer Credit Counseling Service about some of the new provisions. They begin with what's happened since the Credit CARD Reform Act was enacted in August of 2009.
Todd Mark: All the creditors that were concerned about what they couldn't do, such as increasing interest rates, they started doing that, en masse. Matter of fact, I'd be surprised if you didn't get a letter.
Sam Baker: That I did.
Todd Mark: "Congratulations, as a long-time customer, we're going to raise your interest rate to 25 percent."
Sam Baker: It almost makes you wonder; what was the point, then, of putting this in place, if all of the card-issuers were going to try their best to circumvent the law in the first place?
Todd Mark: It really is it was unfortunate that there was such a timeline for them to get prepared. Because they knew that this was going to cut into their profits and their revenue. So, they monetized it in the meanwhile as much as they possibly could. It doesn't mean that there are not some other traps that are coming our way, some other unintended ramifications of the Credit CARD Act. We'll discuss that as well.
Sam Baker: Well, for cards with multiple interest rates--like low rates on transferred balances and higher rates on new purchases--portion of payments over the minimum, companies have been applying that to the highest-rate balances first, or they're supposed to, now?
Todd Mark: They are now. So before, they would apply it to the lowest interest rate debt. So, that cheap 3 percent balance, they'll say, We'll pay that down, but your 24 percent balance on some transfer that you had? No, no, no, that's going to continue to accrue.' Today, actually starting February 22nd, it reverses. Beyond the minimum, whatever excess, will always go to the highest interest rate portion of your balance.
Sam Baker: Double-cycle billings now banned?
Todd Mark: It is. That effectively guarantees that you've got a true grace period. It's not that if you had a $200 balance this month and zeros last month that you're suddenly triggered into, Well, it was really a $150 average over a period of time.' You're only going to be billed on what you carried during that cycle.
Sam Baker: Okay. Clearer disclosures about account terms and costs, what are we going to see now that we didn't before?
Todd Mark: That's one of the big protections here. Really, it's educational for consumers to see in their statement every month what it's going to cost them and how long it's going to take if they're only making minimum payments on their credit card bill. We always talk about, is it 15 or 20 years? They're going to say, Based on your balance and this minimum payment how long will it take?' If it's eleven years and how much are you going to pay in interest beyond the principle. It's also going to lay out what it's going to cost you if you want to pay it off in three years.
Sam Baker: Well, all of that is great, but you have to read it. Do most people do that?
Todd Mark: No, you know, we always encourage people to read the fine print. This isn't going to even be fine print, Sam! This is going to be up in bold lettering, known as the Schumer Box, so people will be able to see it easily and clearly. Make sure you're opening up your statement every month. Don't just make a minimum payment. Read through, ensure that there aren't any changes of terms (which is another part of this act, making sure that there's proper disclosure) and read that box. Make sure you don't get caught into what we call "minimum payment syndrome", where you are paying for years on things that maybe only lasted a day, like a meal.
Sam Baker: Was failure to read the terms, was that a problem, or has that been a problem all along?
Todd Mark: Most people don't want to read the fine print on terms. Oftentimes, when they sign up, they don't even understand the terms of the card. Is it fixed or is it variable? How high is the ceiling? What can trigger interest rate changes? What are the fees? What are the grace periods? People don't understand these things. They just know that they want a credit card so they can swipe and get stuff. So, hopefully, with the focus on financial literacy and education as part of this Credit CARD Act, folks are going to see on their statements it's going to be really easy to understand the good and the bad of using credit. So hopefully they're going to use that for a positive, and start paying down on those debts in a timely fashion.
Sam Baker: But the traps can still be there. For instance, with these new terms that are being put in front of you, you probably have to be a bit more diligent about timing, when you send in your payments. For instance, if a payment maybe gets to them on a Sunday what happens?
Todd Mark: Sure. The disclosures are a big key here, and the timing is a key, as well. You do have 21 days from the time that your bill gets there to get the payment in and it's considered on-time. So they need to get that to you 21 days before the actual due date. They're also going to put in the statement: what is the date when you trigger a late fee, and what happens if you fully miss a payment--are you triggering some sort of penalty fee, interest rate, and how high that's going to go? Now, the good news, even though this doesn't eliminate all the tricks, it kind of lays out the rules of when they can make interest rate hikes. Good news: as long as you are paying your bill on time every month, meeting your obligation, they're not going to be able to increase your interest rates, other than a few exceptions. Now the big key is making your payments as agreed. If you miss two full payments, if you're 60 days behind, they can still go back and retroactively increase your interest rate on all your old charges. So, it's really key that you don't fall behind. If you fall behind one month, get caught up. You don't want to get to this point where they can trigger a higher interest rate on old payments. Otherwise, that's kind of banned.
Sam Baker: So, the old rule still applies, then. The best protection is don't charge more than you can pay off in one month and then pay it off in full.
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Todd Mark: Sam, as always, the best use of a credit card is using it as you would cash. Pay it off on-time and in full every month. Certainly don't buy more than you can afford. Don't live beyond your means. But at the very least, make sure that you're honoring your obligation. They're not going to be able to trigger universal default. That was one of those yucky practices of the past, where even if you're current on one card but you're late on another, they'll see that on your credit report and increase your interest rates or cut your credit line on those as well. Today they can't do that. Now, remember, if you're behind, that's when they can start triggering interest rates on future payments. If you're behind two months that's when they can trigger interest rates higher on your previous charges. So you don't want to fall behind, that's one of the keys.
Sam Baker: You know, one of the outs used to be if you didn't like the terms you were getting from a card issuer you could always shop around and go look for better rates, better terms and all of this. Given what's been happening, though, since this act went into effect and beforehand, does shopping around provide as many options as it used to?
Todd Mark: Well, it's a different world we're living in as far as lending and borrowing on credit cards right now. Certainly they're looking at different requirements as far as credit scoring to get access to credit and the deals that are offered are very different. Did you know that in the last quarter 29 percent of new credit card applications offered included an annual fee? Now think about that. Most folks want to shop based on cash back or frequent flyer miles and now almost 30 percent of them have an annual fee attached. You're going to be looking around for the card that has the least expense. But let me talk about one of the unintended consequences of this act. We are seeing more and more folks who are good payers, and I mean the best those that pay off on time and in full that are being notified that they are going to start having an annual fee. You would think that they would be pricing based on risk and those that don't use as responsibly - and that's how it was always done in the past but now they're saying, "We're going to monetize those who we generally give 30 day interest-free loans to." And that hurts if you use a credit card the way we want to see you use it, paying it off on time and in full. It's going to change how you shop. It's going to change the offers, because before you're looking based on best interest rate and best loyalty programs. Now you still may be picking by what's the least expensive fee on an annual basis.
Sam Baker: It's an odd way to look at it, but, quite possibly could this be the best thing that has come around for people who are behaving irresponsibly with credit?
Todd Mark: Well, first off, even if you're behaving responsibly, if we do move to an annual fee sort of society when it comes to credit cards, maybe that's going to encourage people to only carry a couple in their purse or wallet, rather than 20 or 25, because there's going to be fees on every single one of them. So, if that means that people are only taking out the credit that they need and only using the credit that they need, that's a good thing. Absolutely for those who do live beyond their means, there is a call to action of saying, Look, you're going to need to start paying down these debts. We're putting in the statement on a monthly basis the cost to you if you're not doing more than the minimum payment.' So hopefully there is going to be a call to action. I don't think it's just because of the Credit CARD Act, I think it's because of the economy we're in. Because of the recession we've seen consumer credit and revolving credit from the Federal Reserve reports it's definitely fallen in the last few quarters. People are reigning in their spending and they're trying to save more. Now, that could be good behavior and that could simply be a reflection that as people lose jobs they don't have money to spend and it reflects more on the credit lines that have been cut back. Regardless, we are seeing revolving consumer credit fall, and that to me is a good thing.
Sam Baker: This is all encouraging good practices on the part of consumers. Do you have any reason to believe, despite these new restrictions, we're going to see good or better practices on the part of credit card companies?
Todd Mark: Well, Sam, you're going to see some reaction to the Credit CARD Act. As we just said, some folks that aren't used to paying fees are probably going to be getting them likely as annual fees. Really key, though, is what's going to happen to interest rates, especially for those with poor to middle credit. We actually saw in November a bank come out with a 79.9 percent interest rate card. Exactly! That's...
Sam Baker: 79.9 percent?
Todd Mark: 79.9 percent! You're seeing others that are up in the fifties. They're saying, well if we can't do it in late fees, over-the-limit fees and some of the other fees that they're used to getting from folks, they're going to do it in a higher interest rate. Now, if you think that we're risk-averse to seeing people charge up debts on credit cards now, imagine if instead of talking about interest rates in the twenties or thirties, we're talking about the fifties or the seventies.
Sam Baker: Those are for people with the worst credit.
Todd Mark: Absolutely.
Sam Baker: Okay.
Todd Mark: But if you feel that you're left out of the credit market and have no other options, people are going to still go that way and it's extremely expensive. Once again, you're going to have to really figure out how much you need and only utilize what you need and how you can improve your credit so you're getting better offers than those high interest rates.
Sam Baker: Any new, any other provisions that I may have missed that we need to touch on?
Todd Mark: There are some good protections for college students that are really exciting. You're not going to be seeing free pizza, free t-shirts, free umbrellas on campus anymore. Believe it or not, they've got a view a thousand feet away from the institutions to market, so that's kind of good news. Really key, though, is for folks under 21, you need to show one of two things in order to get a credit card. You need to either have a co-signer that could be mom or dad, that could be your roommate if they're old enough. Or, you need to have proof of income, proof that you can justify having a credit card, that you have a means of paying it back. So that's really good news, because we see so many students that see a credit card as a rite of passage in their first year at college and they get into a lot of trouble in that very first year because they're out on their own making decisions for themselves for the first time. It's a learning curve, so this is saying, without either mom and dad's oversight, or somebody else's a co-signer or proof that you've got a job to mean that you can have a credit card, you're not going to get it. That's really good news in my mind, making sure that kids are encouraged to learn. Ideally under the tutelage of somebody else who has access and understanding of credit. So, that is really key. On new credit cards, you are not going to see your credit card interest rates go up for the first year. So that's very good. Unless, for some reason, if you open up a variable card. At that point the teaser rate's got to last at least six months. That's good, because some people were signing up online for cards with extremely low interest rates but they don't see in the fine print that it triggers in two months or three months up to something much higher. But remember, if it's fixed, you don't have to worry about it changing for at least the first year, as long as you pay your bills on time. The other thing we didn't discuss is the right to opt-out.
Sam Baker: What recourse do consumers have in all of this, with these new changes?
Todd Mark: Well, a big thing, is that credit card companies have to give 45 days advance notice of any change to your terms, whether that's interest rates or something else relating to your account. Now, you can accept that, or, you have the right to opt out and say, I want to pay under my old terms. There's a good chance that that means you're cancelling your card, but at least you're not having your interest rate applied, you know, to past charges at a much higher rate. So you can say, all right, I want to pay as I've paid in the past few years, I've got my outstanding balance, and they're going to set up a plan where you're either paying it off in no less than five years not that you can't pay it off sooner than that but they're not going to trigger it and say, Pay us in full in the next six months or a year.' They have to give you a minimum of five years to pay it off, or, they can do no more than double your minimum payment that was required in the past. They have to honor that. So they can't trigger up and say, You owe us three or four times your monthly bill because you fired us and you're cancelling with us.'
Sam Baker: Final question. Does cancelling your card affect your credit score?
Todd Mark: Yes. Cancelling your card does have an impact on your credit score and that's going to be another one of the unintended consequences of this act. If people see that annual fees start coming in, and they start cancelling cards that they've had a long, positive history with, that does come into play with your credit report and score; specifically, in the length of your credit history and certainly when it comes to your second most important factor, your utilization ratio. So if you close cards that are zeroed out with no balance and you only leave open the cards that you've got balances on, that balance you have looks like a much bigger percentage of the total credit you have available. That's known as your utilization ratio.
Sam Baker: So it's best, what, to just to leave them open?
Todd Mark: It's generally best, once you've got credit open, to leave it as-is. Opening accounts or closing accounts can have detrimental affects to your credit. So, if you're starting with zero credit, obviously only open up the credit that you need. It's going to be interesting, though, to see what consumers do if they're faced with the conundrum of, Do I continue to keep a credit card even in the face of a $90 annual fee?' Or, do they say, I'm not paying that fee, I'm closing it, although it may be a detriment to my credit score.' And we're going to see how consumers react to that.
Todd Mark is Vice President - Education with Consumer Credit Counseling Service.
You can find more about provisions of the Credit CARD Reform Act at KERA.org/economy