Beware: Loopholes in the Credit CARD Act you need to know about
The credit card reform bill, otherwise known as the Credit CARD Act, goes into effect next month (on February 22, to be exact). While there’s a lot to be grateful for in this legislation, there are also some omissions, loopholes and flat-out giveaways to the credit card companies of which consumers need to be aware.
WalletPop talked to Lauren Bowne, an attorney with Consumers Union, the nonprofit consumer-advocacy group (and publishers of Consumer Reports). Bowne has been tracking this act as officials get ready for its launch, and she offered WalletPop readers a list of loopholes to watch out for when you use your credit cards after the CARD Act kicks in.
The bad news
There is no cap on the interest rate card companies are allowed to charge. While companies can’t hike your rates on existing balances unless you’re 60 days late with a payment, they can raise rates on future purchases any time and for any (or no) reason, warns Bowne. They do have to tell you this, but they’ll probably send it in an envelope that looks like junk mail in the hopes you’ll throw it out.
Lesson? Read everything your credit card company sends you! Issuers have to give you a 45-day warning, and a new rate can kick in as soon as two weeks after they send you that notice. If you don’t want to pay the new interest rate on future purchases, your only choice is to stop using the card (or pay your balance in full every month).
While the CARD Act has limits on the severity of penalty fees you can be charged, there’s no rule against card companies making up as many new fees as they can conjure and charging whatever they like for them. MSNBC’s Red Tape Chronicles tackled this topic in a recent post. Some issuers have already started adding annual fees to cards that didn’t used to require them, and are also adding things like fees for paper statements. Some are even adding “inactivity fees” if you don’t use your card for a long period.
Expect to see more of this in the future, experts say. (Yet another reason to read all the mail your credit card company sends you, so you can opt out or, at worst, cancel the card if you don’t want to pay the new fees.)
The Red Tape Chronicles also highlighted another area of fee creep: Card companies are allowed to — so it’s safe to assume they will — raise existing fees. The amount you pay for anything from balance transfers to cash advances has already been creeping up. Be prepared to see it rise further in the future. Again — and we can’t say this enough — read your mail. If a fee for, say, balance transfers pops up, be sure not to transfer a balance or even stop using that card.
We told you card companies can’t hike your rates on existing balances. That’s true as long as you have a fixed-rate card instead of a variable rate card, says Bowne, and that is a loophole big enough to drive an armored truck through. This is the reason why card issuers have been switching people to variable-rate cards as fast as they can print out and mail the notices.
Right now, most variable rates are in line with or maybe even a little lower than the fixed rates users were paying before. This is because the “variable” part of the variable rate, called the prime rate, is at a historic low because the government is keeping interest rates very low. Translation: When the Federal Reserve raises interest rates — which most experts think will happen in about a year, give or take — to prevent inflation, your interest rate’s going to rise, too. Our best advice? Pay those balances down as soon as possible to avoid paying more when interest rates go up.
While issuers have to give you 45 days’ notice before making most kinds of changes to your account (such as raising rates), there are two important exceptions, Bowne says: Your card company can lower your credit limit or close your card without giving you any warning at all. So what’s a consumer to do?
Your best move in this case would be to call the issuer, ask why they made the change and see if they’ll reverse it. If not, it’s a good idea to pay down that balance as fast as possible, since a lowered limit can impact your credit score by skewing your utilization ratio. Bowne says issuers tend to close cards that are inactive or aren’t used very often. However, if you find yourself with a closed card that has a balance on it, it’s in your best interest to pay that off as fast as possible, since the issuer will likely report that balance as the credit limit, making it look as if you’ve maxed out your spending.
Why we pick ‘debit’ rather than ‘credit’
When you punch in a PIN to pay with your debit card, you’re saving the store — and maybe yourself in the long run — some money.
Posted by Karen Datko
We recently changed the way we buy most stuff — be it groceries at the supermarket or paint at the hardware store. When we swipe our debit card, we type in our PIN. That’s the “debit” choice when card users are asked to pick “credit” or “debit.”
How does your credit compare?
Why are we doing this? When you say “credit” and provide a signature — sometimes waived, depending on how much you “charge” with your card — you’re allowing the banks to siphon more money from the store and, ultimately, the consumers.
A recent New York Times story explained how this came to be — and gives a lot of the credit, shall we say, to Visa. Here’s a very condensed version:
When debit cards were introduced, merchants could accept them without paying a fee to the banks. But that all changed in the 1990s when Visa offered to process debit card transactions on its credit card network — creating the “credit” with signature choice.
Visa also set higher fees for each transaction as a financial incentive to attract more clients — banks that agree to issue Visa-branded credit and debit cards. Naturally, more banks signed up. “By 1999,” the Times said, “Visa was setting fees of $1.35 on a $100 purchase, while Maestro and other regional PIN networks charged less than a dime, Federal Reserve data show.” (Maestro belonged to MasterCard.)
More recently, Visa has taken an interest in the PIN-transaction market, too. Visa controls 73% of the signature debit market and is the dominant player in the PIN debit market with 42%.
How does this affect you and me?
Merchants pay a processing fee for each transaction plus an “interchange” fee that’s a percentage — usually 1% to 3% — of the purchase price. Interchange fees from debit and credit card purchases brought in $45 billion for banks last year, more than double their take in 2002.
That’s the fee that makes businesses angry. The Times said, “Some merchants say there should be no interchange fees on debit purchases, because the money comes directly out of a checking account and does not include the risks and losses associated with credit cards.”
Merchants pass the fees on to consumers in the form of higher prices, which are paid by everyone, even those who use cash. “The National Retail Federation estimates those lucrative interchange fees cost households an average of $427 in 2008,” the Times said.
So far, PIN transactions cost merchants less than signature transactions. “When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code,” the Times said. Small merchants pay even more.
But that could change. Debit cards have already surpassed credit cards in popularity and are expected to beat out cash by 2012 as our favorite way of buying things. There’s more money to be made by Visa, MasterCard and the banks.
What’s your game plan for 2010?
Some, including members of Congress, are looking at regulating the fees, but years of lawsuits and complaints about the unfairness of it all haven’t had much impact.
Would it make a difference if these fees were lowered? Would, for instance, merchants hire more employees or drop their prices if we all switched to PIN transactions (or made all purchases with cash)? It’s hard to say.
Obviously one person’s decision to punch in a PIN won’t amount to a hill of beans or cheaper kibble. But when we consider that more money stays with our locally owned grocery store — well-regarded for its support of local charities and events — rather than being siphoned off to some big bank, that’s enough for us.
New Requirements for Credit Card Disclosures
The first phase of the Credit Card Accountability Responsibility and Disclosure Act (aka Credit Card Act) goes into effect February 22, 2010. The new law will require certain disclosures to all credit card consumers. The following disclosures must be present on every monthly statement sent to credit card borrowers:
1.The total number of months it will take for the consumer to pay off their credit card if they only make the minimum payment. This disclosure is very important because many debtors are under the false belief that paying only the minimum payment on their credit card will pay off the card in a few years. That is far from the truth. Depending on the balance of the credit card it could take 10 years or more to pay off a credit card paying only the minimum payment.
2.The total cost of the credit card loan. This cost will include the principal and interest if the consumer only makes the minimum payment as noted above. This disclosure is necessary to let people know that they will often pay twice or even three or four times for an item they charge to their credit card and repay over the years.
3.The payment amount the borrower needs to make if they want to pay off their credit card loan in 36 months. This disclosure will definitely help millions of Americans come to terms with their credit card debt. When debtors begin to realize that they need to pay $1,000 per month over the course of three years to pay off their maxed out credit cards they may seriously consider bankruptcy if they don’t have the income.
Earthquake Relief for Haiti
In an effort to help those who have been affected by the earthquake in Haiti, and their continuing tragedies, Credit Card Management Services, Inc. d.b.a Debthelper.com is now a collection center to help those in need.
Your gift will help distribute relief supplies to children and families impacted by the earthquake and aftershocks in Haiti.
Anything you are willing to provide will be greatly appreciated and invaluable to the families you will be helping. The immediate need is dry foods such as rice, beans; can foods, tents and army type cots, blankets and medical supplies.
Where: 4611 Okeechobee Blvd. Suite 114 WPB, FL 33417
Time: Mon – Fri: 9:00am – 8pm; Sat: 12:00pm – 5:00pm
Information: (561) 472-8000
Attention Car Owners – Do You Need a Reality Check?
This is a guest post from Joe Plemon from Plemon Financial Coaching who authors the blog Personal Finance by the Book.
“Geraldine”, a sassy lady portrayed by the late Flip Wilson, answered her husband thusly when he demanded an explanation for yet another new dress: “The Devil made me do it! I was walking down the street minding my own business when he snuck up behind me and pushed me into that dress store. He MADE me try on! Then he pulled a gun on me and forced me to buy it and sign your name to a check.”
Geraldine’s humor is timeless because so many of us can relate to it. For example, have you ever bought a new car and then wondered what possessed you to do it? I doubt if it was the devil, but the devil’s first cousin, car fever, will have the same results.
Do you currently own a car you wish you had never bought? Are you asking yourself if you should try to sell it or just live with it? This post is designed to help you think through this dilemma.
Start by asking yourself these questions:
How much do I owe on it?
If you paid cash, then you are probably not facing a financial crisis necessitating the sale of the car. If you simply don’t like the car, then take your time, sell it and pay cash for another one. If you are in debt, move on to question two.
How big a burden is this car on my budget?
If one hiccup in your life will cause you to start missing payments, then you need to amputate this car before that hiccup occurs. Even if you are easily making your payments, you still might be deceived into thinking all is well. Long term debt on a depreciating asset such as a car is a formula for staying perpetually in car debt. To break that cycle, you need to get the car paid off in 24 months or less and then keep driving it while you save cash for your next car. If you are on track to do so, then keep the car and enjoy it. If not, you should seriously consider getting rid of it.
If I am seriously considering selling, how do I go about it?
Knowledge is power. First, you need to learn if you are upside down (owe more than the car is worth). Check http://www.kbb.com/ to learn the private party value* of your car. If this value is less than what you owe, you are upside down. *(Use private party value because you are money ahead selling the car yourself).
But how does this work? Here is an example: You owe $22,000 on your “Geraldine” car and you could sell it for $18,000 (private party sale on http://www.kbb.com), thus putting you $4,000 upside down. If you decided to buy a $3,000 car (we will call the “beater”), your new debt would be $3,000 plus $4,000 = $7,000. You are still upside down, but you have eliminated $15,000 of debt.
How do I go about selling a car I am upside down on?
Unless you have an extra $4,000 available, you will need to borrow it in order to get the title released. So where do you borrow the money from?
Start by checking with the title holder. You have done your homework, so explain your rationale. In effect, you are asking for an unsecured loan on your upside down amount. Most lenders are not thrilled by this, but explain that this same amount of the current loan is already unsecured and you are simply asking that they move this amount from a more expensive car to a less expensive car.
If the title holder balks, don’t give up. Try your credit union or your home town bank, explaining that you will be moving your business to them. If you simply can’t find financing, consider other options such as selling stuff (Craigs List or Ebay or yard sales) or temporarily working a part time job.
REALITY CHECK: Are you ready to get your Geraldine car out of your life? Good! Doing so will not only be a huge relief, but will teach you to never again succumb to car fever. Still, you need to go into this decision with both eyes open, so the following pros and cons will help you preview the reality of your decision:
The Good
◦LESS DEBT. You have just reduced your total debt by $15,000!
◦OUT OF DEBT QUICKER: From our example, with an 8% loan and monthly payments of $400, your Geraldine car will be paid for in 5 years and 9 months. Your “beater”, on the other hand, will be paid off in only 19 months.
◦STAY OUT OF DEBT: Once the beater is paid off, you could save $4,800 toward another car by making payments to yourself for one year. Assuming your beater would bring $2,000, you could upgrade to a $6,800 paid for car. Had you stuck with your Geraldine car, it would have depreciated to about $12,000 by now and you would still owe $13,300 on it.
◦PEACE: You will know that you have taken the steps to undo that Geraldine decision. This is a great feeling.
The Reality Check
◦INCONVENIENCE: Selling your car and buying another is a hassle.
◦A DOWNGRADED DRIVE: Face it: your Geraldine car is nicer than a beater will be. Be prepared for it.
◦LESS DEPENDABILITY: No doubt your beater will have some issues. You need to be realistic in assuming that it will not be as dependable as a newer car.
◦MORE MAINTENANCE: With less dependability comes more maintenance.
◦FRIENDS WON’T UNDERSTAND: Reality? Yes. Negative? Not really. Just be prepared for it.
One Final Reality Check
You may not be able to arrange the necessary financing. Why? Either your credit score is not adequate or you are too far upside down. Should this be your scenario, you will need to strategically pay down all other debt in order to free up enough cash flow to make huge car payments. Keep the car until it is paid off or you will be swimming in car debt for years to come.
DEBTHELPER.COM 