Best Results Organizing

By the beginning of February, most consumers have the doldrums. New Year’s resolutions to organize finances have faded in the shadow of piles of credit card statement reflecting holiday excesses. This February, however, brings some good news, as most of the elements of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, designed to bring a little bit of fairness to credit card practices, rolls into place as of 2/22/2010.

A few of the provisions actually went into effect last August, just three months after Congress passed the law. As of last summer, lenders are now required to mail credit card statements 21 days before the payment is due. You might have noticed a lead-time creep over the past few years, when companies were only required to mail statements 14 days prior to due dates. With weekends and national holidays in the mix, it gave very little turnaround time for struggling (or disorganized) consumers.

Another provision that went into effect last August was requiring 45 days advanced notice of changes to interest rates and fees. Credit card companies used to only have to give only 15 days of advanced notice before raising interest rates.

What do the new changes mean for you? 

Let’s Talk About Rates, Baby!

Perhaps one of the biggest boons for consumers is the new provision that credit card issuers can’t increase rates on existing balances unless:

–payments are more than 60 days late
–the teaser rate has expired
–your card has a variable rate tied to a financial index that has increased

Until now, when your credit card rate changed, it would mean increasing the interest rates on your pre-existing balance–a retroactive rate hike! It would be like the clerk from the grocery store showing up at your house, demanding more money for the pint of Ben & Jerry’s you bought the prior night.

Sure, we all know that the best thing is to never carry a credit card balance, but this is the real world and Paper Doll realizes that some of you do carry balances, that there are no unicorns and that George Clooney hasn’t called to make sure I’ve saved Valentine’s Day for him. (Sigh…)

If you’re carrying a credit card balance at a non-teaser fixed rate and you’re keeping your payments current, your issuer can’t raise the rate on that balance. And, except for expiring teaser rates, credit card issuers can’t increase the interest rate on new purchases in the first year you hold a card.

Note, however, that the interest rates on all future purchases can increase (as long as the issuer abides by the other rules, as noted throughout this post).

Don’t Be A Tease

In the past, credit card company teaser rates (those low, low rates they dangle to get you to sign up?) sometimes lasted as few as five or six weeks! Under the CARD Act, teaser rates must stay in effect for at least six months. No more sneaky teases!

It’s a Whole New Universe!

Had you ever heard of universal default? That was the policy that credit card companies could (and would) raise your rates if they learned that you had been late or otherwise defaulted on terms of other accounts unrelated to their own company. Rates of 6.9% had previously shot up to 29.9% on Card A because a person had been reported late (even if reported in error) on Card B operated by another company. Now, the CARD Act has eliminated universal default, bringing things back down to Earth.

Stop Spinning Your Wheels–No More Double-Cycle Billing

Another sneaky method some credit card companies have used is two-cycle billing, where issuers were averaging daily balances from the previous billing cycle because carrying a balance eliminates a cardholder’s right to a grace period. Yes, if you had a card with two-cycle billing (I’m looking at you, DiscoverCard!), you were paying interest on debt you’d already paid! The CARD Act does away with two-cycle billing.

In The Interest of Full Disclosure

Savvy Paper Doll readers certainly already know that if one only pays the “minimum” payment required by a credit card company, it can take years of extra payments (and extra interest) to pay off credit card debt. However, many consumers don’t realize this, and they certainly don’t realize the extent to which their payments for that fancy dinner or fuzzy sweater will be drawn out over time. The CARD Act requires that monthly credit card statements indicate how long it will take to pay off a balance (and the total cost, including all that pesky interest) if you make only minimum payments.

Although this wasn’t required to go into effect until February 22nd, Citi and other card issuers have already started sending the new statements. One consumer with a balance of slightly less than $2700 was shocked to see, in black and white, that paying only the minimum would take 16 years and almost another $2700 in interest! Paper Doll believes the CARD Act disclosures will have a profound impact on the speed with which consumers who are able to pay more towards balances will do so.

Over The Top

In the past, credit card companies could automatically charge you a fee if you went over your credit limit. You’d probably figure that if you have a $5000 credit limit on a card, if your current purchase would put you over the limit, the store clerk would lean over quietly and say “Pardon me, but there seems to be a problem. Perhaps we should use another card.” But nooooooo. Credit card companies apparently believed that the huge humiliation (note my dripping sarcasm?) of such an experience was preferable to huge fees tacked on to an already over-limit card, fees which would then have interest charged on them.

Once the CARD Act goes into effect, over limit fees can only be applied to your purchases if you opt in and give prior approval to the credit card company.

Ready, Fire, Aim: Apply Payments Where They Should Go

As a professional organizer, I’ve had to show clients how they were getting raked over the coals by credit card companies in unexpected ways. Most never knew that if they had a promotional rate (0%, 1.9%, etc.) for a balance transfer to a card that already had a balance, or continued to use that card after doing a balance transfer, that the credit card company wasn’t applying the payments as they assumed. Credit card companies generally applied payments to the lowest interest rate balances, allowing higher interest rate balances to pile up.

Let’s say you transferred a balance of $10,000 to your card, using a 0% promotion. Plus the 3% or 4% processing fee. That fee, plus the transferred amount, would be at 0% until the rate expired. Let’s say you then charged $300 on that same card. Even if you turned around and paid back $300, the $300 would be applied towards your balance with a 0% rate, while your $300 purchase rate balance would sit there, racking up interest, until the original $10,000 was paid off. And it was all explained in the tiny legalese that few consumers ever read.

Now, under the CARD Act, payments in excess of that sneaky old “minimum payment” must be applied against the balance with the highest interest rate first, and then to any other balances, in descending order according to interest rate, yielding impressive long-term consumer savings.

Gimme A Call

If travel or disorganization might keep you from mailing a payment in time to reach the card issuer by deadline, you have electronic alternatives. Online bill-payment from your bank (or right at your credit card company’s site) can give you last minute breathing room. But what if you’re traveling and have no access to Wi-Fi? What if you get hit by a wacky winter storm and have no electricity, let alone internet access? There’s always the phone! However, lots of credit card companies have charged a convenience fee for paying a bill by phone.

Under the CARD Act, if a credit card company does offer a pay-by-phone option, it has to be free unless you need to use a live service representative (instead of a robo-phone) to make a rush payment.

Do You Believe The Children Are Our Future?

Two other provisions will have a direct impact on the future financial health of young adults. In the past, anyone over 18 could apply for (and likely receive) a credit card without substantive proof of financial solvency. With the CARD Act:

–Applicants under 21 years of age will have to have an adult co-sign for their credit cards or otherwise provide actual proof of regular income. 

–Credit card issuers will no longer be allowed to offer sign-up gifts (t-shirts, mugs, flash drives, etc.) on or near (within 1000 feet of) college campuses, or at events sponsored by colleges.

By making it less likely that college students can amass credit cards (and therefore credit card debt) as easily as they can scarf up free pizza, the next generation should be able to graduate without debilitating mounds of (non-educational) financial obligations.

A Chance for a Do-Over

One provision won’t go into effect until August 2010. With it, if consumers are assessed a penalty interest rate because of a late payment, they can reclaim that prior (lower) rate if they pay on time for six consecutive months.

Of course, these new rules mean that lenders are going to be looking for other ways to sock it to you (like charging annual fees for participation in rewards programs), so you still have to be aware and diligent when handling your finances. Be sure to:

Review your statements each month before paying & filing them away. If you use paperless billing, you’re helping the environment but you may not notice small changes if you can’t take a pen or highlighter to mark the changes. (Please, no little highlighter circles on your monitor!  It will make reading future Paper Doll posts very difficult.)

Know the terms of your credit card agreement so you can quickly notice changes or errors and take advantage of opportunities:

• What is your interest rate right now?
• If you have multiple rates (due to promotions) on the same card, do you know which balances are associated with which rates?
• Are your interest rates fixed or variable?
• How long is each promotional rate is in effect? (Is it until the last calendar day of a particular month, or until the last billing date in a statement period?)
• What’s your credit limit on each card? How much of it are you using?
• Are you paying an annual fee? If so, why? Annual fees are generally for perks, so be sure that the perks are something of which you’re actually taking advantage.
• Are you earning points or miles? Have you ever used them? Check to see if you’ve earned enough to get cash back or a statement credit, which provides a better return on investment than dribbles of hard-to-redeem airline miles.

Rein in any bad habits that might negatively impact your FICO score, as we discussed previously.

Know which credit card issuers offer the best alternatives for your particular situation and spending habits. (That way, if your rates do increase, you’ll have time to evaluate the best replacement card.) Do you need a low-interest card? One that offers a particular type of rewards? Peruse sites like BillShrink.com and BankRate.com to analyze your options and search by card issuer, credit score level or card type.

An organized, educated consumer is a powerful force. Paper Doll readers, flex your muscles!