Credit Conpamies Under Control - Or Are They?

On May 22, President Obama signed and enacted into law the Credit CARD Act of 2009. Form a consumer standpoint, the most important feature of the Act is that creditors will generally be prohibited from increasing the annual percentage rate (APR) applicable to an existing balance on an open ended consumer credit card unless:
· The account falls 60 days past due
· The index on which the rate is based changes
· It is a promotional rate that has expired
· A consumer fails to comply with a hardship workout plan.
Also, if the APR is increased because a consumer account falls 60 days past due, the creditor is required to inform the consumer that the rate increase will be terminated (and the prior rate restored) once the creditor receives the minimum payments due in a timely fashion for six months.

Other Provisions

-The Credit CARD Act also requires creditors to give consumers written notice within 45 days of any rate increase or other significant change, and consumers must be informed of their right
to cancel an account prior to the rate increase.
-The mandatory minimum for a credit gift card is 5 years.
-Bills must be mailed to consumers 21 days before payment is due.

The feature of the Act concerning notification requirements takes effect 90 days after enactment, while the remaining features of the Act take effect in February, 2010.

The question concerning the Credit CARD Act is what will it actually do for consumers? Is this really beneficial for consumers and will it have any real effect on what rates the credit card companies charge? Taking a closer look at the provisions of the Act, the consumer benefits are not as strong as they would at first seem. Credit companies providing timely, written notice will not prevent people from going into debt (people get notices now, but no one plans on going into serious credit card debt – statements get discarded). Also, the provision requiring creditors to eliminate the rate increase after minimum payment is made for six months is not beneficial at all. This will encourage consumers to just make the minimum payment, even after the original rate is restored. In most cases, the minimum payment on a balance won’t even cover the accrued interest. Just making the minimum payment could send a consumer spiraling into debt. In terms of its effect on credit companies, the Act does almost nothing to prevent them from charging the rates they want. They are still able to present very low, introductory promotional rates to attract consumers, and later jack up the rates, even on those who won’t be able to pay. The credit companies can charge what they want, as long as they give you timely, written notice.

Throughout the current recession, Americans have barely made a dent in their debt burden. This Act is not likely to have an effect on reducing credit card debt, and if it does, its effect will be marginal. In my opinion, people should beware of anyone attributing personal debt reductions in the future to this Act. If Americans do reduce their debt, it will much more likely be the case that they do so because of a change in consumer mentality and behavior. More people will stop borrowing on their houses and outspending their income. This would result in a lower, but more stable, level of consumption than we’ve seen over the last two decades, and less personal debt.