The New Credit Card Law: Feel-Good Changes, but Not Much Reform

Credit card reform affects nearly all American families. Some 78 percent of households have a credit card and there are more than 631 million credit cards in circulation. Consumers charged more than $2.1 trillion on 26.5 billion transactions in 2008. With this much credit capacity -- the 181 million credit cardholders have an average of 5.4 cards each -- it's no surprise that consumers do not pay off their cards each month. The typical cardholder had $10,679 in debt outstanding at the end of 2008, according to the Nilson Report.

The Credit CARD Act has many good and well-intentioned provisions. For example, it requires credit card companies to make their practices more transparent so that customers can tell exactly how much they are paying in interest and fees when they do not pay off their balance each month. It imposes broad restrictions on companies' ability to increase the interest rate on outstanding balances and to levy penalties for going over the credit limit.

Credit card issuers must also mail consumers their statements three weeks, rather than two weeks, before the payment is due. Companies must apply payments that exceed the minimum to the outstanding balances with the highest interest rate first. Credit card issuers must allow consumers to opt out of their card if they do not agree to changes in their credit terms. It also requires card companies to post details of their standard credit agreement on the Internet so that consumers can more easily do comparison shopping.

The act creates a Web site HelpWithMyBank.gov, which is run by the Office of the Comptroller of the Currency, where consumers can go to find answers to their most common questions. The new law also prohibits a bank from assuming that because you are late with one credit card payment that you will be late on all payments and, in reaction, raise the interest rate on all of your accounts

Finally, the credit card company must tell you how long it will take to pay off your outstanding balance. Thus, if you have $3,000 on a card, you'll learn that it will take 11 years to pay off that balance if you make the minimum $90 monthly payment on a card with a 14.4 percent interest rate.

For the typical American, these changes have a certain feel-good aspect to them.

But, just like the hangover that comes the morning after the party, the CARD act contains some significant downsides.

Take, for example, the restriction on raising interest rates. It is difficult to distinguish the rule from the exceptions. For example, the CARD act prohibits banks from increasing the interest rate on an existing balance unless 1) the bank told you that it would increase the rate when you opened the account; 2) you have a variable rate card and the index on which that card is based increases; 3) you fail to make your required minimum payment within 60 days, or 4) you are having trouble making your payments and you don't meet the "workout" arrangement that you made with your bank. As long as the credit card issuer gives sufficient advance warning, it can levy whatever interest rate on new purchases it would like.

Consider also the time it takes to get your balance to zero. You might not notice that you'll pay off that $3,000 balance in 11 years only if you don't make any additional charges on the card.

While the bill limits some fees, a credit card issuer may increase the annual fee for the privilege of having a credit card. It may also charge a fee if you make cash advances, if you receive your statement by mail, and if you use your card in a foreign country.

The bill does nothing to address the underlying reason for high credit balances. Many customers find that essential expenses that once were affordable are now out of their reach. For example, college tuition costs have risen at twice the rate of inflation, making higher education much more expensive than it was a decade ago. Nearly one out of every three American college students uses a credit card to pay some portion of the tuition bill.

Another example: that $3,000 mentioned above, by coincidence, happens to be the average monthly credit card debt carried by a typical college student, according to the federal student loan agency Sallie Mae. Since 82 percent of students don't pay off their monthly balance, their credit card burden worsens as a student moves through college. The typical senior in the class of 2008 graduated with more than $4,100 in credit card debt, up an astounding 41 percent from the $2,900 debt carried by the class of 2004.

The new law does help students avoid the credit card trap by not allowing anyone under 21 years old to obtain a credit card without proof of sufficient income, either independently or through a co-signer. This provision might help reduce future debt burden of college students, but it will not help the nearly 40 percent of freshman who arrive on campus with a credit card already in hand and who end their first year of college with more than $900 in debt.

So, where do we stand with credit card reform? Unfortunately, it appears that the reforms are largely symbolic. Most consumers are likely to find that there is not a lot of reform in the Credit CARD act.