Obama Credit Card Reform Act Passes Congress
Limits on Card Issuers Ability to Alter Agreements
May 21, 2009
On March 4, 2009 Obama proposed a plan to assist home owners to modify their mortgage loans or refinance their mortgages. With the public emphasis on issues faced by credit card holders President Obama moves on a second front to directly assist consumers with reforms.
Congress Acts within Days of New Mexico Meeting
The Congress acted with unprecedented speed after President Obama held his town hall meeting in Rio Rancho, New Mexico. The Senate passed the bill 90 - 5 on May 18 and the House passed the bill 361 – 64 on May 20. The Act will take effect in February, 2010
Credit Cards an Intimate Part of American Economy
Credit card debt is an integral part of the economic picture. Credit card debt has increased by 25% over the past decade, reaching $963 billion in January. More than 75% of U.S. households have credit cards, and 44% carry a balance. The percentage of accounts more than 30 days late has risen from 3.9% at the end of 2006 to 5.6% by the end of 2008, and penalty fees now total $15 billion a year, around 10% of credit card revenues. Credit card debt can saddle a consumer for years.
Consumers to Have More Certainty
Issuers of credit cards have had the ability to alter the terms of credit card agreements nearly at will. The Credit Card Act will place significant limits on the unilateral actions altering interest rates and other conditions of credit card use.
Sweeping Changes in the Credit Card Business
The Act’s key consumer protections are:
- Credit card companies will be drastically limited in their abilities to change rates, a dramatic shift from the present where issuers can raise rates "at any time, for any reason."
- Credit card companies cannot increase a card holder’s interest rate during an account's first year. Following the first year, a credit card issuer can increase the interest rate if the holder is 60 days late in making a payment.
- If there is a rate increase, the new legislation requires an account review every six months and mandates a lower rate if recent payment history is timely. The older, lower interest rate will be reinstated if bills are paid on time.
- When there are balances with different interest rates on the same card payments must be applied to the balance with the highest rate first. Currently, credit card companies generally apply the payment to the balance with the lowest interest rate.
- Double-cycle billing is prohibited.
- Credit card companies must disclose how the total interest to be paid and how long it will take to pay off the balance if only the minimum monthly payment is made.
- Over-the-limit fees cannot be charged unless a cardholder agrees to allow issuers to complete transactions that breach the credit limit.
- Fees for paying bills online or by phone are banned.
- Credit card marketing to those under 21 will become more difficult. Anyone under 21-years old, must have a parent or guardian co-sign unless the consumer can provide proof of the ability to repay the credit card loan.
- Statements must be mailed at least 21 days before the balance is due.
- There must be 45 days notice (rather than 15 days) before a card’s interest rate can be increased.
Great for Consumers, but Market will React
The Act will add transparency to consumer relations with credit card issuers, but interest rate restrictions will hurt profits. There are likely to be market consequences to the Act. These may include:
- Elimination of Grace Periods
- Reinstitution of Annual Fees
- Maximized Use of Current Practices Until February, 2010
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