Updated: May 3, 2013 12:15PM
Being in debt is about to get a lot more expensive for millions of Americans. Credit card issuers have been rushing to raise rates in advance of this Thursday, when the first provisions of the Credit Card Accountability Responsibility and Disclosure Act (CARD) will go into effect, with other protections starting in February 2010.
Starting this week, card issuers need to give you more time to pay your bills. Now, instead of mailing bills 14 days before the due date, issuers must send bills 21 days in advance of the payment date. That will mean fewer people will get hit with late fees because of postal delays.
Another provision going into effect this week requires card issuers to give you 45 days' notice when they plan to raise your rate, instead of the current 15-day advance notice. That's behind the rash of notifications sent in recent weeks, advising you that no matter what your credit history, you'll be paying higher rates.
More protections next year
Meanwhile, card issuers are gearing up for next year's additional restrictions. Those include a ban on marketing to students or anyone under age 21. They'll be required to have a parent or guardian as a co-signer -- unless they can provide proof that they have income to make the payments.
There will also be more interest rate restrictions. Starting in February, if there's an interest rate hike, it cannot be applied to existing balances. And if you carry a balance that has a variety of interest rates, when you make a payment it must be credited to the portion of the balance with the highest annual percentage rate.
There also will be changes in the card issuers' ability to charge fees for going over your credit limit. Starting in February, consumers must be given the chance to opt out of this system. Instead, they can choose to have a transaction rejected at the point of sale if it will incur a fee.
Starting next year, the bill bans double-cycle billing, where the issuer uses your average daily balance from both the previous and current billing cycle to assess your finance charges.
And next summer, the law also gives consumers protections on gift cards, prohibiting gift cards with expiration dates within five years, and setting limits on dormancy or inactive fees on gift cards.
You pay for others' defaults
Americans are rolling nearly $1 trillion in card balances from month to month. And nearly half of those cardholders are making only the minimum monthly payments. As you might imagine, those accounts are very profitable to the credit card issuers -- until the cardholders default or file for bankruptcy. Then those write-offs add to the costs that must be borne by the remaining card users.
Individual bankruptcies are up 36 percent for the first half of this year, compared with last year. And that translates into more defaults on card balances. Bank of America, the largest bank in the country, reported its default rate jumped to 13.8 percent in June from 12.5 percent in May. Other issuers such as JPMorgan Chase, Citigroup, Capitol One, Discover and American Express have reported default rates around the 10 percent level.
According to Bill Hardekopf, CEO of LowCards.com, a free consumer resource Web site on credit cards, you can expect card issuers to charge even more fees to make up for those losses. He predicts more card issuers will charge annual fees, up from the current 20 percent that do so today.
And he forecasts that many card issuers will solve the problem of advance notice of rate changes by simply making their cards "variable rate" cards, subject to an index such as the prime rate, plus a few percentage points. Then when interest rates go up, your card's interest rate will rise automatically.
Card issuers are also cutting back on reward programs, or making it more difficult to earn or redeem points. And some have started charging a fee of as much as 5 percent for transferring a balance. It will hardly be worthwhile to search for a lower rate card if you have to pay this much to move your outstanding balance.
Don't leave home WITH it
All of the consumer protections in the new law can't protect you against yourself! If you keep adding to your card balance, you're bound to be hit with higher costs -- one way or another.
I'm often asked what people should do when they get a notice of higher finance charges. The answer is simple -- but certainly not easy. As long as you carry a balance, you're at the mercy of your lender. Your only recourse is to pay down the balance! And the formula for doing that -- if you can manage it -- is also simple: Just double the current minimum monthly payment, and pay that amount every month, without charging another penny. Your card will be paid off in about 2½ years -- and you'll save a fortune in interest.
Paying down credit balances is never easy, and it's even more difficult in the midst of a recession. But it's your only way out. And that's the Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.