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CARD Act Review: Debit Card Rules

The Credit CARD Act, passed last year, will take full effect later this month (August 22), so there’s no better time to review the changes you can expect to see when that deadline arrives. Here’s what to look out for from your debit card and bank.

The New Normal: No Overdraft Coverage

Thanks to provisions in the CARD Act, banks must now offer overdraft protection (also known as abusive overdraft loans) to consumers on an opt-in basis, meaning that you won’t get this “service” unless you specifically sign up for it. Specifically:

• Old way = Over-limit purchases go through, cost money. Before the new restrictions, most banks charged overdraft fees automatically for transactions that exceeded a customer’s limit. A customer could easily rack up hundreds of dollars in fees in a single day without realizing it, because every over-limit purchase would trigger a separate fee.
• New way = Customers choose what protection they want. Now, you can decide whether or not you want banks to “cover” you on over-limit purchases and hit you with a fee for that “service.” For many customers, it makes more sense to have a transaction declined and avoid the fee.

But, as this Consumerist.com article points out, some banks are pushing hard for consumers to sign up for overdraft protection—and it’s no wonder, since banks make billions of dollars in fees from such “services.”

So how can you avoid paying fees for a service you may not want? Try these tips, which can help you keep track of your money (and avoid costly overdraft loans).

• Carry some cash: Some analysts suggest paying cash for any purchase under $10. That way, even if you opt in to overdraft protection, you won’t get dinged with a hefty fee for a tiny purchase.
• Pay with your credit card: If you’re not the cash-toting type, choose credit instead of debit. But treat your credit card like a debit card—pay the balance in full each month, or you’ll end up paying so much in interest any overdraft savings might be canceled out.
• Know the loopholes: The overdraft protection opt-in does not apply to all transactions—checks and recurring debit card deductions (like automatic bill payments) may still be subject to overdraft fees, depending on your bank’s policy. If you aren’t sure what that policy is, call your bank’s customer service department to find out.
• Keep track of your account: Whether you use a checkbook registry or log on to view your account information online daily, perhaps the best way to make sure you don’t go over your limits is to keep tabs on your money so you don’t forget about purchases and spend money you don’t actually have.

For a more detailed look at the new debit card rules, check out the Federal Reserve’s summary.

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What Do You Know about Your Credit Card Agreement?

A recent study from CreditCards.com illuminates a worrying issue about credit cards that may not be addressed by the Credit CARD Act (taking full effect later this month).

The study, which examined what it calls the “readability” of various credit card agreements, found some troubling trends, including:

• The average credit card agreement (that long document of fine print you have to sign when you open a new credit card) is written at a 12th grade reading level.
• The average American, it seems, reads at a ninth grade reading level, though as many as 48 percent read at a sixth grade level or below.
• As many as 80 percent of American adults have reading skills that aren’t up to the task of deciphering the language included in credit card agreements.

Taking into consideration from this study, it’s not at all surprising that Americans are getting in over their heads with credit card debt—to the extent that bankruptcy filings are expected to approach two million this year, according to sources.

Encouraging Changes

While the findings of the readability study may be cause for concern, there is some good news out there. For one thing, the study was reportedly made possible because of one requirement of the Credit CARD Act, which requires credit card issuers to submit copies of their card agreements to the Federal Reserve and for the Fed to post those agreements online.

And, as sources indicate, the average American needn’t always be at a loss when trying to understand the fine print in a card agreement:

• The newly mandated Consumer Financial Protection Bureau will have the ability to require credit card issuers to write their agreements in plain English, so that more credit card users can understand what they’re signing up for.
• Some banks apparently already write their agreements at a ninth grade level or below, which is what consumer advocates recommend. For a list of banks that offer more understandable contracts, see the CreditCards.com article.
• New requirements from the Fed mean that credit card agreements must include a one-page summary document of terms (which is a good thing, considering at least one agreement studied included more than 20,000 words!). This should outline the major terms a card requires.

So what does it all mean? The lack of readability in credit card agreements is scary partly because most consumer advocates push consumers to read in full any document before signing it – but reading doesn’t always mean understanding. If you aren’t sure about your card’s terms, consider asking a trusted friend or advisor to guide you or switching to one of the easier-to-fathom cards mentioned in the article.

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Look Out for More (Legal) Credit Card Fees

With the Credit CARD Act set to take full effect on August 22, many credit card issuers are reportedly already altering their policies to come into compliance with the law. And, because that law seriously limits some of the fees issuers can charge (including overdraft fees), many banks are also, according to this article, introducing new fees.

What You Might Notice

Make sure you’re reading your credit card statements closely in the coming months, as any new fees will be mentioned there. Here are some you might encounter:

• Annual Fee: This isn’t a new one, but many issuers have abandoned annual fees in favor of inactivity fees, charging customers who don’t use their cards often enough. Because the CARD Act outlaws inactivity fees, sources note that you should expect the annual fee to work much the same way: if you make enough purchases, your issuer might waive the expense, but if you don’t spend a minimum amount of money (i.e. if your account is too inactive), expect to pay.
• Foreign Transaction Fee: This is for when you make purchases in another country (regardless of currency) and is often charged in addition to a currency conversion fee. You can apparently expect this one to come to one to three percent of each purchase you make—to minimize the amount you pay, taking large amounts of cash out of ATMs and making cash-only transactions is often the best plan.
• Cash Advance Fee: Again, this one is already company standard, but sources report that you can expect your cash advance fee to rise in the coming months. Remember: cash advance may be convenient, but it’s expensive, as card issuers charge both a flat transaction fee and a steep interest rate (usually higher than your overall interest rate).
• Paper Statement Fee: Like receiving your monthly statement in the mail? It seems many banks have begun charging fees (ranging from $1 to $9 per month) to those who want paper statements. If you’ve got an email address and a printer (or digital storage space), you might want to opt out of this.
• Setup Fee: This is reportedly already common practice on most secured credit cards, which essentially work like debit cards: the transactions you make are secured by money you pay to the credit card company ahead of time. While secured credit cards can be useful as credit rebuilding tools to those with weak credit (including those recovering from bankruptcy filings), they’re expensive and often come laden with fees, so that you might have to pay a couple hundred dollars just to activate your account.
• Reward fees: Whether you want to redeem your rewards points or get them back after an issuer takes them as a penalty (maybe for a late payment), you’ll have to pay, usually between $20 and $50, according to the article mentioned earlier.

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The Latest Credit Card Regulations from the Federal Reserve

Certain provisions of the Credit Card Accountability and Responsibility and Disclosure Act (Credit CARD Act) that President Obama signed into law last year will go into effect on August 22, 2010. As that date approaches, the Federal Reserve has been announcing adjustments and modifications to prepare consumers.

A few such adjustments were announced this week. The final rule issued by the Fed (which amends Regulation Z, also known as the Truth in Lending Act) includes these provisions:

• Credit card issuers cannot charge more than $25 for late payments or other violations of an account’s terms unless a user has incurred prior fines or a higher fee constitutes a reasonable percentage of the transaction that caused the violation.
• Card issuers cannot charge fines or fees that exceed a card user’s payment. For transactions less than $25, the fee can equal up to the purchase amount.
• Issuers are no longer permitted to charge “inactivity” fees to penalize customers who do not use their accounts for a certain amount of time.
• Issuers can no longer charge multiple fines or fees for a single violation of the terms of the account (such as a late payment).
• Issuers that have increased rates since the beginning of 2009 must reevaluate whether the reason for the rate increase (such as a drop in credit score) still exists, and, if the reason no longer exists, to lower the interest rate.

A detailed, step-by-step look at the new regulations can be found at the Federal Reserve’s consumers page.

Other Changes to Note

The Fed also offers explanations of those changes that took effect on February 22 of this year. If you haven’t already noticed, these changes include:

• Advance notice of fee or interest rate increases: Card issuers are required to inform consumers at least 45 days in advance of such changes.
• Length of time to pay off a balance: This is a handy feature, since it clearly states how long it would take to pay off your debt making only the minimum payment. Your statement should also identify how much you need to pay each month in order to pay off your debt in three years.
• Application of increased interest rates: Should your credit card issuer increase your interest rate, it cannot apply the new rate to existing debt; only new purchases can be charged at that rate.

For a full examination of the changes, be sure to check out the Fed’s site. How are these changes affecting you? Leave your thoughts in the comments below.

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Shortcomings of Credit CARD Act

This week saw the much-anticipated date (February 22) on which the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) took full effect. And, while it theoretically introduces many new consumer protections, it leaves plenty room for “creativity” from card issuers.

Center for Responsibility Lending Responds

The Center for Responsible Lending released a humorous (though cynical) animated video that highlights some of the areas not addressed by the new act—and illustrates ways in which credit card issuers have adapted their policies to maintain profit levels. These include:

• Interest rate hikes: To compensate for lost revenue, some card issuers have already raised users’ interest rates. Even users in good standing may be “forcibly eligible” for this, as the video claims.
• Over-limit fees: If you accidentally exceed your credit limit, your cardholder likely charges a fee. And, with new restrictions in place on other charges they can assess, you might see this fee jump.
• Inactivity fees: On the other hand, if you use your card too infrequently, you might see a fee for that, as well, because that means you’re less profitable for the company.
• Increased minimum payments: Another technique some card issuers are using is to up the minimum amount you can pay each month. This could be profitable for those who won’t be able to afford the increased payments and can be charged an under-payment fee.

The Regulation-Creativity Relationship

As the video illustrates with a graph, more consumer protection may seem like a good thing, but in practice, it often means that card issuers just get more “creative” with fees they charge reasons they charge them.

If you’re thinking now is a good time to get out of credit cards altogether, you’re not alone, but, before you cancel your cards, consider this:

• Your credit score: Part of your credit score is based on age of accounts (older ones are better); another part is based on diversity of credit (so eliminating one type entirely would hurt you).
• Your reentry: If, at some future time, you decide you want a credit card again, you’ll likely have to contend with uber-high interest rates (above 70 percent) because you won’t have any recent credit card history.

The video exaggerates a little (by mentioning, for example, a “legibility fee” for left-handed users), but by doing so draws attention to the more serious matter of how significantly your credit card could change.

Be sure to read all correspondence from your card issuer, even mailings that seem like junk: some of them might contain important details about the new rates and fees you may have to pay. These statements will also come in handy if mounting fees and interest force you into bankruptcy.

Additional Resources

Credit CARD Act

Posted in Credit, Credit Cards, Credit and Bankruptcy, credit CARD act | Comments Off