New Rules to Protect Credit Card Holders

In July 2010, new rules will go into effect that will finally give credit card holders some much needed relief from rapidly changing credit card terms and unfairly imposed late fees and penalties.

The Federal Reserve has approved many new changes to protect credit card holders who have been at the mercy of credit card companies that have been unilaterally changing terms and retroactively hiking interest rates. Highlights include:

• A limit on interest rate increases
• Payments go to balances with the highest interest rates first
• An end to universal default
• Additional time to make payments

From 0 to 25 - Stop the Interest Rate Hikes!

You're approved for a low-interest or even zero percent credit card and before you know it, the interest rate is tripled, and you have already run up a balance on the card. The minimum payment has increased to an amount that threatens to break your budget.

Worry no more! When the new rules go into effect, credit card companies won't be allowed to raise interest rates on new transactions during the first year, except under limited circumstances:

• The rate increase was disclosed to you when you opened the account
• The card has a variable rate

After the first year, the credit card company may only increase the interest rate on new transactions if they give you 45 days' notice of the change. In addition, interest rates on existing balances can only be raised if the minimum payment is received more than 30 days after the due date.

Higher Interest Balances Paid First

Most credit card companies assess different interest rates on your account depending on the type of transaction. Generally, cash advances are assessed the highest rate, followed by the regular purchase rate, and promotional offers carry the lowest rate.

Currently, payments you make above your minimum amount due are credited to the balance with the lowest rate first, until that balance is paid in full. In the meantime, the balances with the higher rates are paid last. For example, if you take a cash advance, and continue to use the card for purchases at the regular purchase rate, the high interest cash advance balance may never be reduced.

Under the new rules, any payments you make above your minimum amount due will go to the higher interest rates first, or will be distributed among all balances proportionately. No longer will credit card companies be able to maintain your higher interest balances indefinitely.

Universal Default Eliminated

Universal default refers to the practice of credit card companies raising interest rates on a cardholder based on the their payment history with a different creditor. So, even if you pay your credit card "A" bill on time every month, if creditor "A" finds out you defaulted on your credit card "B" account, creditor "A" may consider you a risk and raise the interest rates on your credit card "A" account. The new rules eliminate this practice.

More Time to Make Payments

The new rules eliminate an unfair practice whereby credit card companies send out their bills with a due date that gives the cardholder very little time to make the required payment. Of course, if your payment is received late, a significant late fee is added to your account balance.

When the new rules go into effect, credit card companies will have to give cardholders a reasonable amount of time to make their payments. The rules require companies to give cardholders at least 21 days from the date the bill is mailed or delivered to make their payment.

In the Meantime

The Federal Reserve has given credit card companies until July 1, 2010 to implement these new rules. In the meantime, you should make sure you protect your credit score by paying your monthly payment on time. If you get a notice that your interest rate is about to be increased or your credit limit reduced, contact the credit card company and ask about your rights to opt out of the changes and cancel the card.

If you are already dealing with a high interest rate card, try to pay down your credit card balance and stop using it. If you qualify, transfer your high interest balance to a zero interest card to give you some time to pay off your debt without accruing additional interest. However, most of the time you only get a short time period for the zero-interest before a higher rate applies. Read the fine print.

Related Resources on Lawyers.com^sm