What You Need To Know About Credit Cards

WHAT YOU NEED TO KNOW ABOUT CREDIT CARDS

Credit cards can be a useful tool, if you know how to play by the credit card issuers’ rules. Those rules changed substantially in 2009, when President Obama signed the Credit Card Act of 2009 into law.

The Credit Card Act of 2009 serves to benefit consumers and prohibit unfair practices of credit card companies. A few benefits of the Credit Card Act, which are important for every credit card holder to know, are:

1. Retroactive interest rate increases on existing balances are prohibited, except in very limited situations. Prior to this new law, interest rates could be increased on an entire existing balance for a number of reasons, including a late payment. Now, interest rates can only be increased as to future charges.
2. No more “universal default” – Credit card issuers used to, under the terms of their contracts, periodically check a cardholder’s credit report to look for any delinquencies or defaults on any account. If the credit card issuer found a default on any other account (any account, including other credit cards, utilities, etc.), then the credit card issuer could increase the cardholder’s interest rate, even if the cardholder was in perfect standing with the credit card issuer. The Credit Card Act banned this practice for existing card balances.
3. Over- limit fees are banned if consumers don’t “opt-in” to them. Prior to this legislation, credit card issuers would automatically charge cardholders substantial over-limit fees for transactions that exceeded the cardholder’s credit limit. Now, credit card issuers must decline all such transactions unless the cardholder has given specific permission to approve said transactions and be charged over- limit fees.
4. Credit card issuers may no longer charge cardholders a fee for paying their bill online, via telephone, or via mail.
5. Finance charges for previous billing cycles may no longer be charged to a cardholder unless there was a returned payment for insufficient funds or a disputed transaction.
6. Monthly statements must disclose how long it will take the cardholder to pay off his/her current balance if he/she only pays the minimum payment due each month. The minimum payment is usually 4% of the current balance.
7. Offering free gifts in exchange for college students signing up for a credit card is banned if done within 1,000 feet of a college campus.

The Credit Card Act of 2009 was Congress’ attempt to level the playing field between card issuers and consumers by requiring card issuers to enact policies that are clearer and more fair to consumers.  Although the legislation was signed into law in April 2009, it remains to be seen whether it will be as helpful as intended to consumers.

According to Fitch Ratings, the current credit card default rate amongst consumers nationwide  is approximately 13%. The average cardholder has 4 credit cards, and the average credit card debt per U.S. household is approximately $16,000.00. According to the Federal Reserve, the total U.S. consumer revolving debt is $853 billion, and credit card debt makes up approximately 98% of that. It is clear from the statistics that credit cards use remains popular, even with the rise in popularity of debit cards.

Debit cards can help reduce credit card balances for consumers. Debit cards work just like credit cards, but are instead linked to a consumer’s bank account, so the consumer is not borrowing money every time he/she uses a debit card, and instead, the money comes directly out of the debit card holder’s bank account, just as if the holder had paid cash. Debit cards have most of the same protections against fraud that credit cards do, and are accepted everywhere credit cards are accepted.

Consumer advocacy organizations strongly promote debit card use as a way for consumers to lessen their debt and cut excessive spending, with good cause: according to AACER, total consumer bankruptcy filings reached 1.4 million in 2009, up from previous years. Various studies have shown the catalyst of over 90% of bankruptcy filings to be excessive credit card debt.

When used sparingly, credit cards can be a useful tool. However, dealing with credit card debt is never easy and can be overwhelming at times. As always, consumers with questions about credit card debt and its possible effects should consult a licensed attorney in their state.

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