Your next credit card statement is going to contain an ugly truth: how much that card really costs to use. Now, thanks to a long-awaited law that goes into effect today, you’ll know that if you pay the minimum on a $3,000 balance with a 14 percent interest rate, it could take you 10 years to pay off. “Jaws will drop,” said David Robertson, publisher of the Nilson Report, a newsletter that tracks the industry. “I don’t doubt for a nanosecond that it’s going to give a lot of people a sinking feeling in their stomachs.” The idea behind the landmark law was to prevent banks from using practices that often dug borrowers deeper into debt. Here’s a look at the new credit card law: BACKGROUND During the past nine months, credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive. Consumer advocates say the law still offers important protections. IMPACT INTEREST RATES [ The interest rate cannot be raised in the first year after an account is opened unless an introductory rate has come to an end. After that, cardholders must be notified 45 days in advance of any rate change. For existing balances, rates can’t be raised unless the account is at least 60 days past due. If payments are made on time for six consecutive months, the original rate must be restored. There’s still no cap on rates. DISCLOSURES [ Cardholders will see how many months it will take to pay off a balance if only minimum payments are made. Statements will also indicate how much needs to be paid each month to pay off a balance within three years. SERVICE FEES [ Service fees, such as activation and annual fees, will be capped at 25 percent of the credit limit during the first year of use. After that, there is no cap. GRACE PERIODS [ The law requires that due dates remain consistent. Statements must be sent out 21 days before the payment due date, and finance charges and fees cannot be applied before that period is up. In practice, about half of card issuers have extended grace periods to as long as 25 days. UNIVERSAL DEFAULT [ Card companies cannot raise interest rates on existing credit card balances. Interest rates can’t rise during the first year an account is open, unless the original agreement spelled out a promotional rate for a limited time. Consumers with older accounts must be informed of any interest rate increase on new charges at least 45 days in advance. They must also be given a chance to opt out of the hike by canceling the account and paying down the balance at the old interest rate. If an interest rate is increased, the card company must review the account once every six months to assess whether the rate should be dropped. STUDENTS [ Credit cards may no longer be issued to anyone under age 21, unless the applicant has a co-signer or can show independent means to repay the debt. Colleges must disclose any marketing deals they make with credit card companies. Banks are not allowed to hand out gifts on or near campuses or at college-related events. – Associated Press PAYDAY LOAN COMPARISON The average fee for a $100 payday loan is $15. If you translate that two-week advance into an annualized rate, as on a credit card, you’re looking at a 391 percent interest rate. By that measure, the payday lending industry says its rates are cheaper than alternatives available to risky borrowers. An overdraft fee on a checking account: 755 percent annual rate. A bounced check: 1,449 percent annual rate. Source: Community Financial Services Association of America
