A Consumer’s Guide to the New Credit Card Rules

http://www.nytimes.com/2009/05/20/yo...pagewanted=all

At first glance, the sweeping credit card legislation that passed the Senate on Tuesday looks like a huge victory for consumers. The bill (and similar legislation that has already passed the House) contains relief from penalty fees and instant interest rate spikes. It even limits expiration dates on gift cards.

And certain cardholders who carry a balance may ultimately pay less under the new rules. But for people who pay their bills off each month, and milk the card rewards programs for everything they are worth, there is some cause for concern.

For months now, the card companies have been threatening to cut rewards programs sharply, even for people who never get into trouble with debt and late payments, to make up for revenue lost to the new restrictions.

My guess, however, is that this talk is just so much saber-rattling. Card companies want to make money, and big-spending customers help them do it, even if they do not go into debt.

First, let’s lay out the things we know will change because of the new legislation (you can skip to the end, if you’d like, to read more about what might happen with rewards). The bills are filled with new rules, which will take effect at various points in the year after President Obama signs the final bill.

¶First, and perhaps most important, there are new restrictions on when credit card companies can increase the interest rate on balances that you’ve already run up. The Senate bill says that banks must wait until you’re 60 days late in making the minimum payment before they can apply a penalty interest rate to your existing debt; the House bill mandates a 30-day wait.

It’s not yet clear how legislators will reconcile the variations. The House may end up voting on whether to simply accept the Senate’s stricter bill, or there may be a horse-trading conference of sorts to work out compromises.

¶The Senate bill requires card companies to, in effect, lower interest rates for cardholders who have exhibited good behavior and paid on time for six consecutive months. Some cards, like Citi’s new Forward card, already offer a similar feature. The House bill has no such provision.

¶Both bills require card companies to give 45 days’ notice before raising the interest rate. The Senate bill, for good measure, requires such notice for any significant change to the card. That may mean that card companies can no longer spring huge alterations in reward programs, effective immediately, on customers who are just short of a reward that they’ve saved for for years.

¶Banks must send your bill out no later than 21 days before the due date. They cannot send it with, say, 14 days to go, hoping that you won’t get a check back in time to avoid a late fee.

¶If the card company gets your payment by 5 p.m. on the due date, it’s on time, according to the new rules. No more of this early-morning deadline nonsense that some card companies were engaged in, aimed at hitting you with a late fee if your payment arrived with the afternoon mail. Also, no more late fees if the due date is a Sunday or holiday and your payment doesn’t arrive until a day later.

¶Let’s say you’re paying many different interest rates on the debt on a single card, one for a cash advance, another for a balance transfer and a third for a new purchase. Now, when you make a payment over the minimum balance, banks will have to apply it to the highest-interest debt first. I bet you can guess how many banks used to handle this sort of situation.

¶At long last, banks must now ask you to opt in before granting you the “privilege” of spending more than your credit limit and paying a fat $39 fee for the privilege. If you want to pay that fee, you’ll have to ask them first.

¶If you’re a student, it will get harder to get a credit card. In the House version of the bill, no one under 18 can apply for a card unless a parent or legal guardian is along for the ride as a primary cardholder.

The Senate, hopping onto the helicopter parenting movement, wants the minimum age to be 21. The senators note that a spouse can co-sign as well, and students with independent income sources can submit proof and ask for an exception. It is not clear how this will work. Will students working as summer camp counselors need to send in a credit card permission slip from their camp director?

And both houses require written permission from a parent, guardian or spousal co-signer for any increase in a card’s credit line.

¶The House throws in what ought to be called “The Fine Print Rule.” Card companies must print their account applications and disclosures in 12-point type or greater. A supervisory board will also probably declare certain hard-on-the-eyes fonts off limits. The Senate is silent on typeface but imposes many other communication requirements. Read all about it through links to the House bill, the Senate bill (and government summaries of the House and Senate bills from the version of this story at nytimes.com/yourmoney.

¶Hate gift cards? Me, too. The House steers clear of them, but if the Senate has its way, there will be some helpful new rules regarding those absurd dormancy fees, which punish people who let the cards sit around before using them (even though the issuers are, meanwhile, enjoying free use of the money stored in the card).

Under the Senate’s rule, retailers and others that issue Visa, MasterCard, American Express or Discover gift cards or certificates will have to print explicit dormancy fee information on the card. Sellers of the cards will also have to inform the buyer of the fee. That’s a smart twist, since the gift giver can then become aware of the noxious nature of the fee — and elect to give cash or some other gift.

Also, the Senate bans expiration dates on gift cards and certificates any sooner than five years after the card’s original issue date. And the retailer or card issuer will have to print the terms of any expiration date in capital letters in at least 10-point type.

It’s not clear whether this language must be on the card or in a disclosure brochure or packaging that comes with it. But it will be fascinating to see which retailer or card issuer has the chutzpah, after having free use of your money for five years, to tell its customers that it will then take the card back if you don’t use it. So will card companies kill reward programs altogether, or scale them back drastically? Of course not. In fact, Chase is going ahead with the introduction of a major new rewards program this week, knowing full well that it is about to get beaten up by Congress.

“If you strip away the reward component of a credit card, it’s essentially a commodity,” said Rick Ferguson, editorial director at the loyalty marketing company LoyaltyOne. “The reward is what gives it its personality. It works from a branding perspective as well as a mechanism to influence customer behavior and consolidate spending on a particular card.”

That last part is crucial. Sure, people who carry a lot of card debt without defaulting are profitable. But so are people who spend a ton, generating fees galore from merchants back to the card company, as are those customers who may have multiple cards or a checking account and a mortgage at the card-issuing bank, too.

So you may soon see card companies giving more goodies or waiving all annual fees to people who hit certain spending thresholds each year. American Express already does this on a number of cards.

Also, keep in mind that you may have more control over what the card companies do to you than you may think. Banks are going to be testing a bunch of new fees, rewards and other ways to generate revenue or increase loyalty in the new environment.

If you don’t like what they’re doing, make some noise. Send a note to me at rlieber@nytimes.com, so I can write about the latest foolishness — or consumer-friendly twist. Or perhaps you can opt out of the test. Can’t do that? Well, your complaint may still become part of a torrent of data points that will persuade the banks to head in another direction.

“Work your way up the chain,” said Dennis C. Moroney, research direct for bank cards at TowerGroup, a MasterCard-owned financial services consultant. “Banks have to figure out how to position this, but they don’t want to lose your account because of the high cost of replacing you as a customer.”