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Debt smart credit card rules adopted by federal regulators
by Scott Bilker
Scott Bilker is the author of the best-selling books, Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart. He's also the founder of DebtSmart.com. More about and DebtSmart can be found in the online media kit.
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Scott Bilker

I can't believe it! It appears that we consumers have received a major holiday gift this season.Government regulators adopted sweeping new rules for the credit card industry. Finally, rules that protect consumers!

This is certainly a time for celebration, because it's the first time in decades that consumers have received protection from some of the most terrible practices of these banks. I am excited, however, these rules don't go into effect until July 2010. My only fear is that the banks will figure out a way to get around these changes by that time. They are smart, after all, they got our tax money from the bailout and managed to spend it without anyone knowing where it went. And our reward for this bailout? Increased fees, reduced credit limits, and increased rates. I will celebrate our victory with these rules for now, but we all need to keep our eye on the credit card banks to stop them from wiggling out of the deal. After all, we did get these rules through.

These rules that would better protect credit card users by prohibiting certain unfair acts or practices and improving the disclosures consumers receive in connection with credit card accounts and other revolving credit plans.

The final rules prohibiting certain credit card practices were adopted under the Federal Trade Commission Act, and are being issued concurrently with substantially similar final rules by the Office of Thrift Supervision and the National Credit Union Administration. Among other things, the rules will: (1) Protect consumers from unexpected interest charges, including increases in the rate during the first year after account opening and increases in the rate charged on pre-existing credit card balances; (2) Forbid banks from imposing interest charges using the "two-cycle" billing method; (3) Require that consumers receive a reasonable amount of time to make their credit card payments. (4) Prohibit the use of payment allocation methods that unfairly maximize interest charges. (5) Address subprime credit cards by limiting the fees that reduce the amount of available credit.

In finalizing the rules on unfair credit card practices, the Board carefully considered information obtained through consumer testing and more than 60,000 comment letters received during the comment period.

"The revised rules represent the most comprehensive and sweeping reforms ever adopted by the Board for credit card accounts," said Federal Reserve Chairman Ben S. Bernanke. "These protections will allow consumers to access credit on terms that are fair and more easily understood."

The Board is also adopting final rules to revise the disclosures consumers receive in connection with credit card accounts and other revolving credit plans to ensure that information is provided in a timely manner and in a form that is readily understandable. These rules amend Regulation Z (Truth in Lending) and conclude a comprehensive review of the open-end credit rules. The final rules under Regulation Z require changes to the format, timing, and content requirements for credit card applications and solicitations and for the disclosures that consumers receive throughout the life of an open-end account. Many of the changes reflect the result of consumer testing conducted on behalf of the Board during its review.

"Our intent is to increase transparency and fairness in how credit card and deposit accounts operate, thereby enhancing competition and empowering consumers to better manage their accounts and avoid unnecessary costs," said Federal Reserve Governor Randall S. Kroszner. "The rules represent a significant step forward in consumer protection. By ensuring fairness and making credit terms easier to understand, these safeguards should allow more consumers to benefit from using credit."

Both of the final rules addressing credit card accounts take effect on July 1, 2010. Below are the details from new rules:

Highlights of Final Rules Regarding Credit Card Accounts

Regulation AA (Unfair Acts or Practices)

Final Rule The final rule amends Regulation AA to prohibit unfair or deceptive acts or practices by banks in connection with credit card accounts. The effective date for the Regulation AA amendments is July 1, 2010.

Time to Make Payments
The final rule prohibits banks from treating a payment as late for any purpose unless the bank provides a reasonable amount of time for the consumer to make that payment. The rule provides a safe harbor for banks that send periodic statements at least 21 days prior to the payment due date.

Allocation of Payments
When different annual percentage rates (APRs) apply to different balances on a credit card account (for example, purchases, balance transfers, cash advances), the final rule requires banks to allocate payments exceeding the minimum payment to the balance with the highest rate first or pro rata among all of the balances.

Increasing Interest Rates
The final rule requires banks to disclose at account opening all interest rates that will apply to the account and prohibits increases in those rates, except in certain circumstances. First, if a rate disclosed at account opening expires after a specified period of time, banks may apply an increased rate that was also disclosed at account opening. Second, banks may increase a rate due to the operation of an index (in other words, the rate is a variable rate). Third, after the first year, banks may increase a rate for new transactions only after complying with the 45-day advance notice requirement in Regulation Z. Fourth, banks may increase a rate if the minimum payment is received more than 30 days after the due date.

Two-Cycle Billing
The final rule prohibits banks from calculating interest using a method referred to as "two-cycle billing." Under this method, when a consumer pays the entire account balance one month, but does not do so the following month, the bank calculates interest for the second month using the account balance for days in the previous billing cycle as well as the current cycle.

Financing of Security Deposits and Fees
The final rule addresses concerns regarding subprime credit cards with high fees and low credit limits. Banks would be prohibited from financing security deposits and fees for credit availability (such as account-opening fees or membership fees) if charges assessed during the first 12 months would exceed 50 percent of the initial credit limit. The rule also limits the security deposits and fees charged at account opening to 25 percent of the initial credit limit and requires any additional amounts (up to 50 percent) to be spread evenly over at least the next five billing cycles.

Regulation Z (Truth in Lending) Final Rule

The final rule amends Regulation Z to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving (non home-secured) credit plans. The effective date for the Regulation Z amendments is July 1, 2010.

Applications and solicitations
The final rule contains format and content changes to make the credit and charge card application and solicitation disclosures more meaningful and easier for consumers to use. These disclosures are provided in the form of a table that summarizes the key account terms. The changes include:

a) Format Revisions
New format requirements for the summary table include rules regarding type size, the use of boldface type for certain key terms, and the placement of information.

b) Content Revisions
Creditors must disclose the duration that penalty rates may be in effect, simplify disclosures about variable rates and revise disclosures regarding when a grace period is offered on purchases or when no grace period is offered.

Periodic statement disclosures
The final rule contains revisions to make disclosures on periodic statements more understandable, primarily by making changes to the format requirements, such as by grouping fees and interest charges together. The changes include:

a) Interest Charges and Fees
Interest charges and fees must be grouped separately, with a monthly total for each. Interest charges must be itemized according to the type of transaction (such as interest charged on purchases, and interest charged on cash advances). Separate year-to-date totals for fees and interest charges are also required.

b) Effective APR
The requirement to disclose an "effective annual percentage rate" is eliminated due to the lack of consumer understanding of this term. New requirements to disclose interest and fee totals for the month and year-to-date should more effectively inform consumers of the total cost of credit.

c) Minimum Payment Disclosure
The effect of making only the minimum required payment on the time to repay balances must be disclosed, as required by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Changes in consumer's interest rate and other account terms
The final rule expands the circumstances under which consumers receive written notice of changes in the account terms (such as, an increase in the interest rate), and increases the amount of time these notices must be sent before the change becomes effective. The changes include:

a) Increase in Advance Notice for Changes in Terms
The final rule increases the amount of advance notice before a changed term can be imposed from 15 to 45 days to better allow consumers to obtain alternative financing or change their account usage.

b) Requiring Prior Notice for Penalty Rate Increases
Creditors must provide 45 days prior notice before the creditor increases a rate due to the consumer's delinquency or default or as a penalty.

c) Summary Table
When a change-in-terms or penalty-rate notice accompanies a periodic statement, the final rule requires creditors to provide a tabular disclosure on the front side of the periodic statement showing the key terms being changed.

Additional protections
The final rule includes the following additional protections for consumers:

a) "Fixed" Rates
Advertisements may refer to a rate as "fixed" only if a time period is specified for which the rate is fixed and the rate will not increase for any reason during that time, or if a time period is not specified, if the rate will not increase for any reason while the plan is open.

b) Cut-off Times and Due Dates for Mailed Payments
Creditors must set reasonable cut-off hours for mailed payments to be considered timely on the due date. The final rule deems 5 p.m. to be a reasonable time. When mailed payments are not accepted on the due date, such as on weekends or holidays, creditors must consider a payment received on the next business day as timely.

In a related move, the Board is adopting final amendments to Regulation DD (Truth in Savings) to address depository institutions' disclosure practices related to overdraft services. The effective date for the final rules adopted under Regulation DD is January 1, 2010.

Highlights of Rules Regarding Overdraft Services

Regulation DD (Truth in Savings) Final Rule

The final rule amends Regulation DD to address depository institutions' disclosure practices related to overdrafts. The effective date for the Regulation DD amendments is January 1, 2010.

Disclosure of Aggregate Overdraft Fees
The final rule extends to all institutions the requirement to disclose on periodic statements the aggregate dollar amounts charged for overdraft fees and for returned item fees (for the statement period and the year-to-date). Currently, only institutions that promote or advertise the payment of overdrafts must disclose aggregate amounts.

Disclosure of Balance Information
The final rule requires institutions that provide account balance information through an automated system to provide a balance that does not include additional funds that may be made available to cover overdrafts.

The Board is separately proposing rules to protect consumers that use overdraft services offered by their bank. The rule solicits public comment on proposed amendments to Regulation E (Electronic Fund Transfers) intended to provide consumers a choice regarding their institution's payment of overdrafts for automated teller machine withdrawals and one-time debit card transactions. The Board is proposing two alternative approaches to providing consumer choice, including a proposed requirement that would require institutions to obtain consumers' affirmative consent (or opt-in) before any overdraft fees or charges may be imposed on consumers' accounts. The comment period for the Regulation E proposal ends 60 days after publication in the Federal Register.

Regulation E (Electronic Fund Transfers) Proposed Rule

The proposal amends Regulation E to provide consumers certain protections relating to the assessment of overdraft fees. The proposal replaces previously proposed amendments under Regulations AA and DD addressing overdraft services.

Consumer Choice Regarding Overdraft Services
The proposal solicits comment on two approaches to providing consumers a choice regarding the payment of ATM and one-time debit card overdrafts by their financial institution.

a) Opt-out
Under one approach, an institution would be prohibited from imposing an overdraft fee unless the consumer is given an initial notice and a reasonable opportunity to opt out of the institution's overdraft service, and the consumer does not opt out.

b) Opt-in
The second approach would prohibit an institution from imposing an overdraft fee for paying such overdrafts unless the consumer affirmatively consents (or opts in) to the institution's overdraft service.

Debit Holds
The proposal would prohibit institutions from imposing an overdraft fee when the account is overdrawn because of a hold placed on funds in the consumer's account that exceeds the actual transaction amount. The proposed rule is limited to debit card transactions in which the actual transaction amount generally can be determined within a short period of time after the transaction is authorized (for example, transactions at gas stations and restaurants).

You can find more details about the new credit card rules at The Federal Reserve website.

Reader Comments
" Good article. I was glad to see it and think you have a good grasp on what banks are getting away with. It gave good explanation of the rules and was helpful to credit card users to show us what injustices were being practiced and what to watch for and hopefully expect to end only I wish it were now as people are losing jobs and times are rough now. Thank you for all you do.I like that you come on Fish and give advice on finances. I listen to you on Fish (KFSH) when you're on there. Glad you are looking out for our interests. Again thank you."
--Joyce Nicholson
" Wonderful!! Very educational and taught me the meaning of many of the unfamiliar terms used. I will now be able to follow a news report with understanding and may be able to understand the notices sent with my bank statements. Happy and Healthy Holiday Season to you Scott. I look forward to your excellent continuing advice in the New Year 2009. HAVE A PROSPEROUS NEW YEAR. THANK YOU SCOTT!"
" It explained what's happening in terms I understood. Thanks so much! By the way, I remember there used to be limits on how high credit card interest could be. What happened to that?? You guys rock!!!"



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