On May 22, 2009, President Obama signed into law an act designed to protect consumers from surprise credit card charges. Although opposed by many financial companies, Obama strongly endorsed the bill, and it passed Congress with board bi-partisan support.
Obama made it clear that he did not back the changes with the intention of assisting those who buy more than they can afford through “reckless spending or wishful thinking.” “Some get in over their heads by not using the heads,” he said. “I want to be clear: We do not excuse or condone folks who’ve acted irresponsibly.”
According to the White House, nearly 80% of Americans have credit cards, and half of those carry a balance. The average balance is $7,000. The Federal Reserve estimates that the nation is $2.5 trillion in debt, not including home mortgages.
At the signing ceremony, Obama said that many people have become “trapped” because the economic downturn has turned family budgets on their heads. But, he said, “part of it is the practices of the credit card companies.” He criticized policies that allowed for confusing fine print, the sudden appearance of unexplained fees on bills, unannounced shifts in payment deadlines, interest charges or rate increases even when payments aren’t late, and payments directed to balances with the lowest interest rates rather than the highest.
The new credit card rules take effect in nine months and provide:
– Accounts must be at least 60 days late before issuers can raise rates on existing balances. If the cardholder makes the minimum payment on time for six months, the previous rate must be restored.
– Promotional rates cannot rise for six months and rates on new accounts cannot rise for one year.
– Bills must be sent 21 days before the due date.
– Customers must receive 45 days notice of higher rates.
– Customers under age 21 must provide proof of ability to repay credit or get an adult to co-sign.
– Risk-rating policies used to raise interest rates must also be used to lower interest rates.
– Over-the-limit charges may not be made without customer approval.
– Statements must disclose how long it will take to pay off a balance if only a minimum payment is made.
– Statements must include a toll-free number from which consumers can get information about credit counseling and debt management.
The new rules do not provide for:
– Caps on interest rates.
– Prohibitions on new annual fees.
– Prohibitions on late fees and over-the-limit fees.
Getting approved for a new credit card will likely be harder also, even for consumers with high credit ratings. With credit harder to obtain, consumers could begin turning to payday lenders and pawn shops for quick cash, said Greg McBride, senior analyst with Bankrate.com. “In the absence of credit cards, people in need of a short-term loan will resort to other means.”
It is expected that within the next nine months before the new law goes into effect, credit card companies will devise new ways to keep their profits high, such as charging higher rates for new customers, charging higher annual fees, raising fees for services such as balance transfers and cash advances, and issuing cards with lower credit limits. “The next nine months are going to be filled with issuers implementing changes while they still can,” said McBride.