How the Credit CARD Act of 2009 Saves You Money

The Credit CARD Act of 2009 has been pretty well received by many consumer advocates because, despite its weaknesses, it establishes a number of new regulations that help protect consumers from some of the unsavory practices of the credit card industry. There are a number of different ways in which the protections provided by this new law can save consumers money, and in this article I will describe three of those ways.

First of all, one major benefit of this legislation is that it eliminates the practice known as “universal default.” A universal default provision basically allows the card issuers to raise your interest rate if they find that you have been more than 30 days late on any of your payments to any of your creditors. A critical point here is that the card issuer can raise your interest rate even if all of your payments on that particular card have been made on time. Because they don’t understand (or don’t read) the fine print in their credit card terms and conditions, most consumers are not even aware of the existence of this provision until they are informed that their interest rate is being increased, sometimes doubling or tripling, and perhaps getting as high as 29.99 percent. To make matters worse, these consumers may find themselves stuck with this higher interest rate for years, unless they are able to pay off their entire balance or transfer it to a different card. The outlawing of universal default is undoubtedly saving many consumers hundreds of dollars in interest each year.

Second, the new regulations regarding over limit fees will also save some consumers a lot of money. Previously, over limit fees were a big moneymaker for banks and credit card companies. Although consumer should know and remain aware of their credit limit, there are still a large number who sometimes make multiple credit card charges before they even realize that they have exceeded their credit limit. Before this new law took effect early in 2010, the card issuers were smacking consumers with an over limit fee ($39 is pretty typical) for each one of their over limit transactions. Thus, if a person made five over limit transactions, he/she would find themselves facing up to $195 just in over limit fees for those five transaction, even though the total amount of the five purchases might have been only $50 or less. The provisions in the Credit CARD Act dictate that consumers can no longer be charged any over limit fees unless they choose to opt in to overdraft protection. And those who opt in cannot be charged more than one over limit fee per billing cycle, even if they make multiple over limit transactions. Consumers who choose not to opt-in will simply not be allowed to exceed their credit limit, but in this writer’s opinion, that is not necessarily a bad thing.

A third way in which the new law saves consumers money is through requiring credit card issuers to change the way in which payments are applied to existing balances. Before the Credit CARD Act, consumers could often find themselves carrying credit card balances for which they were being charged different interest rates. This occurred when they made some purchases at a low promotional interest rate and other purchases at the regular interest rate. Or, part of their balance could have been from taking cash advances which usually carry a higher rate of interest. Prior to the new legislation, when you carried balances that were being charged different interest rates, the credit card companies would apply your payment first to the lower interest rate balance and then to the higher interest rate balance. Through this practice, the credit card companies could ensure that 1) you would pay off your lower rate balances first, 2) you would end up taking longer to pay off the higher interest balances, and 3) the company would make more money as a result. Now the Credit CARD Act requires that any amount paid above the monthly minimum payment must first be applied to the highest interest rate balance. This requirement enables consumers to pay off their higher interest balances sooner and thereby save money.

There are other ways in which the new law is beneficial to consumers, but the above are three of the ways in which it helps consumers save.

Copyright © 2010  Art Garmon, Ph.D.  All Rights Reserved.

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