The Pros & Cons of Credit Card Reform:

On February 22, 2010 new credit card legislation hammered out last year by the Fed and Congress is set to go into effect and while it will move to eliminate many practices which have adversely impacted consumers, some of the proposed changes may be circumvented by the card issuers and some provisions could actually end up back-firing on consumers. Here are a few of the pros and cons of the legislation:

Pro: Rates on newly issued cards are locked in for a period of 12 months.

Con: This will not apply to variable interest rate credit cards which many card issuers have switched consumers to in anticipation of the reforms, rending the freeze period virtually useless. Note: there is still no nationwide ceiling or cap on the maximum interest rate consumers can be charged.

Pro: Card issuers cannot raise interest rates on current balances arbitrarily at any time for any reason.

Con: The concept of universal default still exists whereby a card issuer may periodically review a consumer’s credit and if their credit score changes for the worse, the card issuer may risk-adjust their rate. If the card was issued to the consumer with a fixed rate, the adjustment can only occur with 45 day notice a year after the account was opened.

Pro: Forty-five day advance disclosure is required for changes to the rate, fees or amendments to any other terms and agreements on the account.

Con: Changes to credit card limits may have been overlooked by legislators. If a card issuer elects to cut a consumer’s card limit, this could adversely impact the consumer’s ability to manage both their credit and their credit score because of the debt-to-credit utilization ratio.

Pro: Consumers must first agree to fees for exceeding their maximum card limit.

Con: If a consumer refuses the surcharge for exceeding their current limit, then they will likely be denied the ability to make any purchases exceeding the limit.

Pro: Young adults between the ages of 18 and 21 must demonstrate the ability to make their card payments or they will be required to get a co-signer on the account.

Con: This could make it more difficult for young people to establish a credit history. However it could also force young adults into using secured credit cards which could end up being a good thing when just starting out using credit.

Pro: Card statements are required to clearly present information regarding rates, fees and credit card terms.

Con: The burden is on consumers to carefully review their monthly statements for any changes and not simply discard them.

Lastly (and obviously), consumers with bad credit should be prepared to pay more. Sub-prime credit card fees will be steep, as high as 50% of the total card limit. On a card with a $1,000 limit that could mean a $500 fee. However the fee must be spread over multiple billing cycles and cannot be assessed all in one payment.

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