5/12/2009

Will the Credit Cardholders’ Bill of Rights Bring Credit Relief?

(anirudhkoul)

H.R. 627, more commonly dubbed as the Credit Cardholders’ Bill of Rights, was passed by the House of Representatives by an overwhelming 357-70 vote on April 30th. The bill, yet to be voted on by the Senate, promises reform in the credit card industry by providing protection for credit cardholders.

The Credit Card Crisis

Why is credit card legislation needed? In 2008, credit card issuers levied $19 billion in penalty fees on families with credit cards and this year, card companies will break all records for late fees, over-limit charges, and other penalties, pulling in more than $20.5 billion. According to House Speaker Nancy Pelosi’s blog, “Credit-card debt in the U.S. has reached a record high of nearly $1 trillion — and almost half of American families currently carry a balance, and for those families the average balance was $7,300. One-fifth of those carrying credit-card debt pay an interest rate above 20 percent.”

Something needed to be done to help the average consumer, that much is clear, but what would H.R. 627 mean for us cardholders? Before jumping into the specifics, let’s cover what first has to take place for this bill to provide any protection, as it has a long journey ahead of it.

The Credit Cardholders’ Bill of Rights Journey to Action

1. First, Senate Bill 414 must pass a Senate vote. Passage of 414 is not the guarantee that H.R. 627 was, as it offers added reform, and we can all guess how persuasive the credit card industry lobby must be.
2. Next, Senate Bill 414 must be merged by H.R. 627, so that the two can live in complete harmony.
    
3. Finally, it must be signed by President Obama – this should not be a tough sale.

If the legislation is still alive after all is said and done, the majority of the bill won’t take effect until July, 2010.

Barring major overhauls, how would the average cardholder benefit from the legislation?

A Summary of the Credit Cardholders’ Bill of Rights

To read the entire bill, you can find it on Representative Maloney’s site in its entirety. You may also check out the one page summary. Here are a few highlights from the summary, along with breakdowns on how it could impact you:

Ending unfair or arbitrary interest rate increases

• 45 days notice before rate increase – in other words, you must be allowed sufficient time to prepare for and potentially prevent rate hikes.
• No more ‘any time, any reason’ rate changes.

Letting consumers set hard credit limits to stop excessive over-limit fees

• No over-limit fees on those with limits – no charges for going over your fixed limit – you simply can’t charge any more.
• Cardholders can set limits – if you want to lower your limit to a fixed amount so that you don’t spend too much, you could potentially do so.

Ending penalties for cardholders who pay on time

• No interest charged during a grace period – this is so that you aren’t double-billed. Additionally, you would not get assessed a fee on interest if you pay your bill on time.

Requiring fair allocation of consumer payments

• No more forcing to pay off lower interest rates first, you should now get to at least pay off a fair allocation if you have cards with varying rates.

Protecting cardholders from due date gimmicks

• Statements must be mailed 25 days before due date (up from 14) – giving you more time to get your payment in and avoid penalty.

Preventing companies from using misleading terms and damaging consumers’ credit ratings

• “Fixed” and “Prime” rate must be used according to set definitions.

Shielding vulnerable consumers from high-fee subprime credit cards

• Fees for subprime cards, with fixed fees over a year exceeding 25 percent of the credit limit, must be paid up front before the card is issued. This is because these cards target those who are the most vulnerable.

What will the Credit Cardholder’s Bill of Rights Mean to you?

It’s clear that H.R. 627 is a step in the right direction for consumer protection. But it’s just a slice of a much larger pie.

• How do you stand to gain relief as a result of this legislation?
• Where do you see further room for reform?
• If you actively choose to not use credit cards, do you think that card users should be granted this relief?

Fore more of GE Miller’s writing, visit the personal finance blog 20somethingfinance.com.