Keeping debt to a minimum is an important part of saving money. But for many, especially credit card holders, staying out of debt is the most difficult of all financial challenges. The Nilson Report, a leading researcher on credit payment systems, advises that the average American credit card holder carried in excess of $10,000 of credit card debt in 2009. USA Today reports that nearly 15 percent of American families continue to hold credit card debt that exceeds 40 percent of their income. Such large balances make saving for the future nearly impossible.
New Credit Card regulations
New credit card regulations enacted under the The Credit Card Accountability, Responsibility and Disclosure Act (or Credit CARD Act) of 2009 aims to help consumers minimize credit card debt and develop more stable financial futures. In March 2010, additional changes were proposed to ensure credit card users would not be charged unreasonable late payment fees and other penalties. The changes also required credit card companies to reconsider interest rate hikes because of a single late payment.
The proposed changes mark the third stage for implementing the CARD Act. The law and amendments help credit card holders avoid falling into debt and make it easier to pay off existing debt. Unfortunately, it also makes credit more expensive and harder to get. Here are some other changes you can expect to see because of the CARD Act.
No Credit? Big Problem
Gone are the days of, "No Credit, No Problem," thinking. The CARD Act will limit card issuer’s ability to charge high fees for late payments and other problems common to those with poor credit. That means the issuers will be more selective in applicants, charge higher upfront fees, and impose smaller credit limits. Experts predict this will lead to the use of more prepaid and secured credit cards by those with poor credit.
Fewer consumers will be taking advantage of transferring balances between cards because introductory rates will be higher and be offered for less time. The CARD Act ensures issuers will offer at least six months on the introductory rates, but most credit card holders will be offered introductory rates of 7 to 9 percent. Very few will be offering zero percent introductory balance transfers.
Credit card companies will be less generous with consumer rewards to make up for revenue lost on fees. Gas cards will offer smaller discounts and rewards programs will be restricted. Expect to wait a lot longer for that cash back bonus.
Credit for Students
The most promising results of the CARD Act are the limits placed on student credit. For many years, credit card companies preyed on students, helping them to rack up huge amounts of debt at high interest rates, luring them with t-shirts and freebies. The problem was so serious that some students even committed suicide over mounting credit card bills. Many point to the case of Sean O’Donnell a 22-year-old college senior who committed suicide in 1999. Sean found himself with $10,000 in credit card debt and took on two jobs while attending college full time. Although he worked hard, he could not pay down his credit card balances. The pressure mounted until he finally took his own life.
At the height of this crisis, one Sallie Mae study showed that 84% of undergraduates had one credit card or more. Students who used credit cards averaged four accounts each. They carried an average balance of $3,173. The Act seeks to change all this limiting the marketing tactics of credit card companies. This will ensure a better future for thousands of college students and America as a whole.