New credit rules are no reason to let guard down

Credit card users: Mark Feb. 22 on your calendar. That's when the next phase of the Credit CARD Act of 2009 will be implemented.

The first changes took place last August when card issuers were required to give consumers 45 days' notice before making major changes to their account and mail statements 21 days before payment is due. This August, statements will be streamlined and language simplified to make the daunting fine print more user-friendly.

Meanwhile, here's a rundown of the major changes coming in February.

A wait to increase rates. Interest rate increases in the first year an account is open will be a thing of the past, as will increases on existing credit card balances. But the issuer will be able to raise your rate in some instances, such as when you are more than 60 days late in paying your bill or when your introductory rate expires after six months.

Another huge exception: Issuers can raise your rate before 12 months is up if your rate is a variable one tied to an index, and the index rises. These indexes are at historic lows, but when rates begin to rise to keep inflation at bay, so will your payments.

Minneapolis consumer attorney Sam Glover, who blogs at CaveatEmptorblog.com, wishes the act included interest rate caps. "I don't understand why 30 or 60 percent interest isn't enough and Congress isn't willing to say it," he said.

Under 21? Prove you can pay. There will be two ways for someone younger than 21 to get a credit card: By finding a co-signer who agrees to be on the hook for the debt or by proving that he or she has the ability to pay. It's unclear how ability to pay will be assessed. No more free T-shirts when you apply for a card, either.

Bev Zupfer Paulus, assistant director of financial literacy at St. Catherine University, is hopeful that this rule will help curb credit card debt among some students and prevent abuse of young people by credit card companies. But John Ulzheimer, president of consumer education for credit.com, isn't convinced that 21-year-olds are any better equipped to handle credit than 19-year-olds. He also fears, and I'm with him, that parents and other adults asked to cosign will thoughtlessly agree.

"The cosigner is equally liable for payment and equally at risk for damaged credit scores," he said.

Opt-in required for over-limit. One of the pricey fees that generate big profits for issuers is the over-limit fee charged if consumers spend more than their credit limit allows. The new rule says that a consumer must tell the bank that it's OK to charge them an over-limit fee.

I'll be paying this debt for how long? Statements will include information about how long it will take to pay off a balance by making only minimum payments as well as the payment amount needed to retire the debt in three years. This is sure to be an eye-opener, if consumers choose to pay attention.

This wave of rules also includes fee caps on subprime credit cards, an end to creditors allocating payments to maximize their profits, and no more double-cycle billing. That's the practice of charging interest on debt that was paid off the previous month; many creditors already have eliminated this greedy behavior.

Details about the upcoming changes can be found at the Federal Reserve's website: www.tinyurl.com/yjyybot.

This is no time for cardholders to become complacent. As we saw last summer before the CARD act's first phase, issuers had a field day raising rates and lowering credit limits, shutting down cards and bumping up fees in order to offset lost profits.

Expect higher foreign transaction fees, annual fees and fees we've never heard of. Ulzheimer, of credit.com, says banks are playing "fee whack-a-mole," the term he uses for the practice of squelching one fee only to have another fee pop up or increase.

Minneapolis-based credit score maker FICO estimates that banks will see a "more than 50 percent drop in the profitability of their previously most-profitable accounts" as a result of the CARD act.

You don't expect companies to sit back and watch that happen, do you? So keep your eyes open, read your mail and try your darndest not to charge more than you can afford to pay off at month's end.