WASHINGTON, Aug. 13 -- Personal Statement by Eleanor Blayney, Consumer Advocate for the Certified Financial Planner Board of Standards (CFP Board):
If you think the recent Credit CARD Act of 2009 means an end to your credit card problems, think again. The Act certainly does put a lid on some unfair practices by credit card issuers. Between August 20, 2009, when the first phase of the legislation goes into effect, and August 2010, issuers will be scrambling to change their methods of assessing interest on unpaid balances, notifying their customers of their credit policies, and promoting new programs. So what does this mean for the consumer?
The Act certainly does put a lid on some unfair practices by credit card issuers. But unless you, the consumer, make just as many changes in the way you use your card and credit, the new legislation will not necessarily improve your personal financial situation. In fact, you could be worse off than ever.
First of all, although the law aims to put a stop to the most egregious practices, it does not make credit cheaper or more available. Second, many of the provisions of the law do not come into effect for six months. This spells trouble for those individuals who now depend on every dollar of their current credit limit. Until next February, card companies can still raise the interest rates on existing balances to compensate for their loss of revenue from the economic contraction and the rise of bankruptcies and delinquent accounts. They are also cancelling accounts, and cutting credit limits, both of which have the effect of damaging consumers' FICO scores, which in turn makes them targets for rate increases. The debt-heavy consumer will become the proverbial turnip further squeezed for blood.
Even consumers who are not credit-limit dependent can expect to pay more, especially next year when the provisions of the Act come fully into effect. Fees will take over from rate increases as the means for credit card companies to stay profitable, and even good credit risks who pay in full every month, will need to be on the look-out for the instances when these fees will be charged. Expect to pay extra for cash advances, service calls to a credit card company employee, paper statements, or balance transfers.
For the next several months, while the credit card companies are busy changing their contracts and billing systems, here's what consumers should do to make sure the new legislation works in their favor:
- Keep using your cards (so they don't get cancelled) but keep your balances low relative to your credit limit. Starting now, credit card companies must give you longer lead time between billing you and the date you have to pay. Use that extra time to get extra funds to pay down that balance.
- Start actually reading those statements before you pay and shred them. They will become the vehicle to inform you of any changes in your credit limit or rates.
- Get out your blackberry or daytimer: time periods and dates become more important than ever under this new law. Make sure you pay your bill on time to avoid increased late fees; if you are late with a payment, make sure it is no more than 60 days late; if you get an interest increase because you go beyond that 60 days, make an extra effort to be on time for the next six months. If you meet that time requirement, the credit card companies are required to restore the lower rate you paid before you were delinquent.
The Act is a maze of time-bound provisions and phase-ins, and credit card companies will certainly be scrambling to find ways out of and around the new restrictions. Consumers, too, need to be positioning themselves to come out ahead. Best advice in this regard: use your credit card for the simple, original reason it was invented: as a more convenient form of cash. Do not use it because you do not have the cash in the first place. Think of it only as a very short-term loan between the time of purchase and the time you pay your bills. Forget about airline tickets and redeemable points: your greatest reward will be a more financially secure life.