JEFFREY BROWN: New rules for the plastic in your wallet.
In the wake of the financial crisis and concerns of growing consumer debt, President Obama last year signed a new law increasing consumer protections for credit card users. Those have been phased in beginning last August, and, today, significant changes involving rates, fees, and customer notification took effect.
We take our own look now with Adam Levin, chairman of the consumer-oriented Web site Credit.com. He’s a former director of the New Jersey Division of Consumer Affairs. And Gail MarksJarvis is a personal finance columnist at The Chicago Tribune. Her column is syndicated nationally.
So, let’s start with new provisions affecting credit card rates. Among those, no new rate hikes are allowed on existing balances in most cases, and companies are required to give 45 days’ notice to change the rate on new purchases.
So, Adam Levin, that goes to some of the key complaints that consumers long had, right?
ADAM LEVIN, chairman, Credit.Com: Consumers were very upset. They were getting what we call environmental rate increases, where, suddenly, they would see their minimum payments doubled, and they would see their rates jump by as much as 10 to 15 percent.
So, oftentimes, you had consumers who were doing the right thing, paying on time, and, suddenly, they would experience this, and they would be knocked off course.
JEFFREY BROWN: And, Gail MarksJarvis, in the new regulations, are there still loopholes or things for consumers to — to look out for?
GAIL MARKSJARVIS, The Chicago Tribune: Sure.
I’m worried that people are going to think that now their interest rates won’t go up. Their interest rates can go up. They just have to be told ahead of time that they’re going up. They have to be given 45 days’ notice. And, if they don’t want their interest rate to go up, they have a right to say that, but that doesn’t give them many options, because, if they say no, the credit card company can say, fine, but we’re cutting you off then. And their payments can be made higher while they’re paying off their credit card.
JEFFREY BROWN: All right, let’s go to the next one.
Gail, I’ll start with you on this one. This is another set of changes that involves disclosures and notification. Companies are supposed to use plain language. And they must tell a customer how long it would take to pay off a balance with just minimum payments.
Now, why is that important?
GAIL MARKSJARVIS: That’s really important, because most people who are making the minimum payments every month think they’re doing exactly what they’re supposed to be doing. They’re on time. They’re getting that minimum out.
What they don’t realize is, they can do that almost forever and still have their credit card balance going. So, under these new rules, you are going to get in your bill an illustration that is going to show you what’s going to happen if you keep just paying the minimum. And you’re going to see how much you’re hurting yourself.
And, if you increase your payment, maybe by just 10 or 15 dollars a month, you’re going to get rid of it years earlier and save yourself thousand of dollars in interest.
JEFFREY BROWN: Adam, this issue of understanding what’s in your bill, understanding the process here has been — has been a long and hard one for a lot of people. Do these — do these new things help that, in terms of the plain language that’s called for?
ADAM LEVIN: No, I think they do. But I think it’s very important to understand the fact that it doesn’t matter how big, how bold, how bright, or better positioned the now less-than-fine, more easily understandable print will be, if you don’t read it.
So, just as we are calling credit card companies and banks to become more accountable, we now have to be more accountable to ourselves. We have to not only get the notice, but we have to read it. There are important rights in here, either the right to opt out of a rate increase or being pitched to opt in to an over-limit program.
If you don’t read it, you’re going to miss it. And, if you miss it, it can have consequences for you. So, it’s important for all of us to step up our game with financial literacy and understand that with rights come responsibilities.
JEFFREY BROWN: There’s a lot of provisions here. I want to just pick a couple more.
Adam, one is called universal default. Now, explain — explain what that — that won’t be allowed anymore, at least for the most part. Explain what that means.
ADAM LEVIN: Well, universal default means that, if you’re late on a mortgage payment, a credit card payment, a utility payment in one sector and, all of a sudden, the credit card companies used to use this as a catalyst for jumping you to the default rate, so you would see sometimes your rate go from 15.99 to close to 30 percent.
Universal default is out when it comes to existing balances. However, with the right for credit card companies to raise your rates on future purchases as long as they give you 45 days’ notice, I’m not terribly convinced that universal default is gone.
And whereas there is a six-month review if they raise your rate on a — if they had raised your rate on existing balances because of certain things you did, if there is a rate increase based on something that happened in your credit report, that negative could stay with you for seven years. They could keep your rate higher for forever, if they wanted to.
JEFFREY BROWN: And, Gail, yet another provision no doubt of interest to a lot of parents out there, this one involves younger consumers. There’s restrictions on marketing to people under 21. Tell us about that.
GAIL MARKSJARVIS: And this is going to be a headache for students that want their own credit cards and parents who don’t want to have to cosign.
But this is, I think, one of the very best measures here. Basically, if you’re under 21 and you don’t have a job that allows you to be able to pay off your credit card, you’re not going to get a credit card unless a parent or someone cosigns with you.
This is extremely important, because we are a nation with people deeply in debt and unable to get out of it. And where a lot of this starts was with college students. They would go to college and, on welcome week, there would be booths there with people offering them credit cards. And they would entice them. They would give them T-shirts and giveaways.
And the students didn’t really understand credit cards. And they would open a bunch of credit cards and maybe use them and leave the bills on their desk, underneath their papers, underneath their books, miss payments. They would get hit with penalties. They would start with 21 percent interest rates that could go even higher. And these students were leaving college deeply in debt and unable to get out of debt.
JEFFREY BROWN: All right, now, in our last minute, Adam, I mean, even as these things are coming into effect, credit card companies are finding new strategies to — to make money for themselves, right?
I noted higher interest rates, of course, switching to more variable-rate cards. More cards have annual fees. What’s going on? What should consumers be looking out for now?
ADAM LEVIN: Well, consumers have to remember that fees are fungible. And for every fee that gets limited or disappears, there’s another fee lurking around the corner, like we have the rebirth of the annual fee, which we haven’t seen in a while with a lot of credit card companies.
We have the inactivity fee, which is, if you don’t charge enough, you will be charged a fee unless and until you charge enough. So, we have to remember, in this time, we have to keep credit card companies somewhere between bored to death and scared to death, or else accounts will be closed, rates will be raised, we will have fee problems and things like that.
Pay down — pay our bills. Pay them on time. Keep our balances under control, and see where we are on a daily basis with our bills, and make sure we understand our credit and where we’re spending.
JEFFREY BROWN: All right, we will leave it there.
Adam Levin and Gail MarksJarvis, thank you both very much.
GAIL MARKSJARVIS: Thank you.
ADAM LEVIN: Thank you.