The first phase of credit card legislation signed by President Obama on May 22 took effect yesterday, August 20, with the remaining provisions going live February 22, 2010.

MyRatePlan Analysis: We’ve listed 12 key provisions of the new law below, along with implications and exceptions.  In general, the new rules chip away or eliminate a wide variety of fees that were often poorly disclosed, significantly reducing fee income for card issuers.   Like any good capitalist company, these issuers will look to recapture that profit in other ways.   As a result, expect to see higher interest rates for all borrowers and less credit available to those with riskier credit.   Annual fees will return for some cards — possibly higher for those with riskier credit.   Reward programs will be pared back as well and there may be newer or higher fees added to participate in those programs.

1. A cardholder must be notified at least 45 days in advance of any change in terms that results in an increase in interest rate (APR) or any increase in fees or finance charges.   For example, if you have a card with an interest rate of Prime + 6%, you must get 45 days notice if the bank wants to raise that to Prime + 8%.  However, if the prime rate itself goes up, no notification is required as that is not a change in terms.  Other exceptions include the end of a promotional offer (see #2) or a payment that is 30 days or more late.
2. Promotional offers (e.g., 0% on balance transfers) must last at least 6 months.  Other than promotional offers, the card terms you agree to when applying should not change for the first year, although some of the exceptions in #1 apply here.
3. The law eliminates retroactive rate increases in most situations, exceptions including the items in #1 and #2.   Bans “any time, any reason” and “universal default”, which included things like raising your credit card rate because you made a late utility payment.
4. If a cardholder is delinquent and a default rate is implemented by the bank, that rate must revert to the original rate after six consecutive months of paying on-time.    Unfortunately, there is no limit in the default rate, so make sure you note that when reviewing the terms for a card you are considering.
5. Bills must be mailed at least 21 days before the due date and requires the payment due date to be the same every month (or closest business day).
6. The law bans “double cycle billing” which basically let banks calculate finance charges in such a way that if you paid off your balance in one month, you still might incur finance charges on that balance in the next month.
7. Also eliminated is the practice of letting consumers exceed their credit line but charging them an “over the limit fee”.   Going forward, a bank must get a customer’s permission in advance to allow transactions that would exceed the credit limit.
8. There are new limits on the fees that can be charged with subprime cards.   MyRatePlan does not list these type cards on its site due to the punitive fee structure that often accompanies them — fees that are assessed to people who can least afford them.
9. Payments must be applied to balances carrying the highest interest rate first.   We’ve written about this issue before, and this change will be particularly beneficial to those taking advantage of 0% balance transfer offers.
10. New restrictions are imposed on marketing credit cards to students.
11. Gift cards are also part of this legislation; they cannot expire for at least 5 years.  In addition, inactivity fees (which usually serve to reduce the card balance) cannot be assessed if the card has been used within the prior 12 months.
12. The law also requires card issuers to do a much better job with clearly disclosing the terms and conditions of their offer, both before sign-up and during the life of the relationship.  An example of this latter item is that monthly bills will need to include information on how long it would take to pay off the balance if only the minimum was paid each month — a figure that will likely surprise many people, hopefully encouraging them to pay more than the minimum.

Recommendations:

1. Get a 0% APR balance transfer credit card
2. Transfer high interest balances
3. Don’t use this new card for other purchases

Annual Savings Potential: Depends on balance– could be $1,000 or more

Discussion According to New York Newsday, credit card interest payments were $116 billion in 2007, with another $23 billion in fees.  If you have reasonably good credit, your contribution to this amount should be about $0.  We all tend to think about the cash or travel rewards associated with a card we are considering.  However, if you are currently carrying a balance on one or more cards, not paying interest for a year will likely be worth far more than any of those other benefits.   (Use our balance transfer calculator to see how much you can save).    Try and find a card without a balance transfer fee — unfortunately most of them do at the current time.

Beware this Catch: More importantly, it can be more expensive than you think if you use your new card to make purchases during the 0% balance transfer period.  Most cards have a disclosure that says something along the lines of “Payments will apply to lower interest rates first”.    Let’s say you get a new card with an interest rate of 10% on purchases, with 0% on balance transfers.  Further, let’s assume you transfer $1,000 from another card, then rack up $1,000 in additional spending your first month.   You then make a $200 payment with your first bill.    Guess what — your card company will apply your payment to your 0% balance, and you’ll end up paying interest on the full $1,000!    As you can see, this provision can significantly reduce the benefit of the 0% APR.

There are two solutions to this dilemma.      You can try and locate a card with 0% APR on both balance transfers and purchases.   Alternately, use your new card to transfer the balances, then stick the new card in a drawer and don’t use it for any additional purchases.