Meltdown 101: Credit card reforms begin to kick in

NEW YORK — New rules meant to give credit card users more information and stop policies that many consider abusive are starting to take effect.

While the bulk of the Credit CARD Act — as in “credit card accountability, responsibility, and disclosure” — won’t kick in until February, two provisions aimed at helping consumers understand their banks’ practices become mandatory starting Thursday.

Once the rules are fully in place, credit card users will have an easier time figuring out the terms of their cards and will be able to refuse to pay higher interest rates and fees. In the meantime, however, some card companies are using the time lag to raise costs to consumers while they still can.

Here are some questions and answers about the new credit-card regulations.

Q: What changes are going into effect this week?

A: As of Thursday, credit card companies will be required to notify customers 45 days before changing interest rates or other significant terms of an account. They also must make sure customers have 21 days between the time statements are sent out and the payment is due, up from 14 days under existing rules.

Q: What else is going to change?

A: Starting in February, credit card statements will begin to spell out in an easy-to-read way how long it will take to pay off a balance if you make only the minimum payment each month.

Credit card companies will no longer be able to raise interest rates on existing balances if you’ve been paying on time, won’t be allowed to raise rates the first year an account is open unless a time-limited promotional rate is explained up front, and will have to review accounts every six months if they do hike rates, to see if they should lower them again.

They will also no longer be allowed to charge fees for going over credit limits unless the consumer agrees to pay that fee, and must apply any amount of payment over the minimum to the highest interest rate balance first.

In addition, there are new restrictions about granting credit to students.

Q: Will these rules only affect credit cards?

A: There are also parts of the new law that limit things like inactivity fees and expiration dates on prepaid cards and gift cards.

Q: How does this affect the average credit card holder?

A: One big change is that consumers facing rate hikes will have the right to cancel a card and pay it off over time at the lower rate if they choose to do so. They’ll also get a clearer understanding of the cost of using credit, and there will be fewer surprises about rate and fee increases and credit limit changes.

Q: Will this help consumers who have already seen their rates increased or credit limits cut?

A: In the short term, banks are likely to keep rate hikes and credit limit cuts in place. But industry observers say they expect that as the economy recovers, competition for customers with strong credit histories will return, and banks will go back to offering competitive rates to lure them.

The requirement that banks review consumer accounts that have seen rate increases every six months may result in some rate reductions, but that’s still a big question.

The best move for consumers in the meantime is to make their payments on time and try to pay down balances, in order to keep their credit scores as high as possible. That will make them more attractive customers as the banking industry revamps and give them more options in the future.

Q: How will I know if my bank is following the rules?

A: Regulators will be keeping a close eye on banks to make sure they’re complying, and since about 90 percent of the cards in the U.S. are issued by the 12 largest banks, most consumers can expect few problems. Additional regulations crafted by the Federal Reserve and other banking regulators will come into play in July 2010, so banks aren’t likely to try to dodge the changes in the Credit CARD Act.

People who think their banks aren’t following the rules can file complaints with the Office of the Comptroller of the Currency, which regulates banks, at www.occ.treas.gov, or by calling 1-800-613-6743.