New Credit Card Rules Going Into Effect On August 22, 2010

If you've ever paid a really high late-payment fee, or if you've ever felt like a sucker after reading the terms and conditions associated with a new credit card and realized you accepted an unreasonable fee schedule, then you'll like today's news. On August 22, 2010, the nation's top banking regulator -- the Federal Reserve -- is set to put into place new rules that limit certain credit card fees. For example, credit card banks will no longer be able to charge more than $25 as a late payment fee, while a penalty fee can no longer exceed $20.

Here's a clip from yesterday's Federal Reserve press release:

• "... Prohibits credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account's terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations.
  
• Prohibits credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20.
  
• Bans "inactivity" fees, such as fees based on the consumer's failure to use the account to make new purchases.
  
• Prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
  
• Requires issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.

The final rule represents the third stage of the Federal Reserve's implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009, which was enacted in May 2009. The provisions of the Act addressed in this rule will generally go into effect on August 22, 2010..."

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The Credit Card Accountability Responsibility and Disclosure Act of 2009

Perhaps you've noticed that you are not receiving loads of credit card offers in the mail anymore. Remember how many you used to get during the credit boom years? Tons. Back then, you may have asked yourself, "how are banks able to make money with credit cards by offering credit to just about anybody? Aren't the bad apples who pay late or default going to cost the banks millions, if not billions?" Good question.

American banks were able to make massive profits from all types of consumers -- including the subprime borrowers -- because they were free to reprice cards whenever they wanted. Even so called fixed-rate cards could be repriced, with little warning. That new credit card customer who turned out to be irresponsible with his finance, as evidenced by late or missing payments, did not phase the banks. As soon as Joe Spendthrift started paying late, or not at all, the banks were free to simply jack up his interest rates to usurious levels, and charge him late fees, over-the-limit fees, telephone payments fees, etc. It was a good time for the banks. They made billions.

Enter the newly enacted Credit Card Accountability Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act of 2009.)

Because banks can no longer reprice credit cards the way they used to, they've had to ditch those tried and profitable models that worked just fine during the boom years, and figure out how to make money within the limits of the new law. Fees and fee traps have been reigned in. Disclosures and terms will have to be easy to access and understand. No more retroactive rate increases.

The credit card banks are also working within the context of the worst recession since the Great Depression. Moreover, since the market for credit card receivables dried up during the early part of the credit crisis, banks won't be able to sell credit-card debt to investors as easily as they used to; not even close.

What can you expect? Most items in the Card Act will go into effect in February 2010. Here's what consumers can expect between now and February, and beyond:

• Lower credit limits.
• Tighter lending standards (i.e. harder to get an application approved)
• More expensive pricing (i.e. higher APRs)
• Less generous rewards programs, with some programs charging a fee for participation
• More manual reviewing of credit card applications, and fewer instant-approval cards
• Documentation requirements: you may have to provide copies of recent paystubs to prove that you are really earning what you declare on your credit card application.

Are we returning to the days when everyone paid a 19.99% annual percentage rate with an annual fee to boot? I doubt it. But terms and conditions won't be favorable until the economy returns to prosperity and banks have had time to figure out how to make strong profits while conforming to the new credit card regulations.

For more on the Credit CARD Act of 2009, visit this page and this page.

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