A closer look at some aspects of the CARD Act.

Posted on by Forest in Saving Money & Finances

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Today, Mr Credit Card from www.askmrcreditcard.com is going to talk about some aspects of the recently passed CARD Act. While many have written about it, he has decided to highlight some questions and points that are not as widely covered.

About a week ago, I asked Forest if I could write a guest post for this blog. I had initially thought about writing something along the lines of frugality to keep in line with the theme of this blog. But Forest asked me to write the recent CARD Act and perhaps it’s implication.

So here’s the rub. Lots of folks and all of the mainstream press and online media have written about it. They have all listed down the key provisions of the bill and how it will affect consumers. But I did not want to write and rehash what has been written elsewhere. So it became a challenge to look through the bill in greater detail and see if anything has been missed. So below are some of my thoughts (more like questions) about the CARD Act. I chose just to highlight a few points which I thought were not covered as widely by others. Hope you will find this helpful.

Does this mean a better deal for folks who transfer balances? – One of the key provisions in the card act is that any payments to credit card companies has to apply to balances with higher interest. For most folks this should never have been an issue even if you carried a balance. But some folks have used their credit cards for cash advances at the ATM (a big no no!) and have a higher rate.

But another area which the old way applying the amount paid by the cardholder was in the area of balance transfers. If a person did a balance transfer at a low rate, any other new charges put on the card would incur a higher interest. But any extra amounts paid by the cardholder only goes towards the balance with the lower interest. Hence, you continue to rack up interest charges if you put any additional charges on the card on top of the balance that was transferred over from your old card. In the pre-CARD Act days, we would recommend folks to do balance transfers not to charge anything else on the card until the balances are fully paid off.

I think the significance of this rule that you can now transfer your balances to a new card and if you still have any credit lines left, you can still use your card. Your payments will go towards these higher interest payments first. So ironically, I think this rule will work out well for folks looking to transfer a balance and switch credit cards.

Can students apply for secured credit cards? – Another important aspect of the CARD Act is that students under the age of 21 must be required to show proof of income for them to be approved for a credit card. Either that or they need a co-signer. There could be a couple of issues for some students. Some might be responsible users and just want a credit card for convenience and their parents do not want to co-sign for them?

Question is : Can they apply for a secured credit card instead? Technically speaking, secured credit cards require a deposit with the credit card issue and that deposit becomes the credit limit and act as a collateral. One would think that this should be considered proof of income? (since it is a collateral). But what if the student does not work and the parents do not want to co-sign? Can they get around the CARD Act by applying for a secured card? I don’t know, but I’m sure this is an interesting question.

What happens if the cosigner has lousy credit? – What happens if the parents do not have great credit? What happens if they have been discharged from bankruptcy? I don’t know? Will the student get approved? If they do, can they get a good credit score and build a good history even if their parents or co-signers credit history sucks? I do not have the answers to this as FICO’s formula is proprietary and it keeps changing. So far, I’ve not seen anything from credit card companies about this topic – so I guess we shall see what happens in the future.

Business Credit Cards will not be affected? – For those who have small business credit cards, the card rules do not really apply to them. Here’s the thing – as long as you use your business card responsibly, you shouldn’t really be affected. But here is a caution to folks who use their business credit cards as a line of credit : do not solely rely on your business credit card as your sole source of lines of credit. Make sure you have other sources from your bank. Get a working capital line of credit from your local bank or union even if all you need is your credit card because you always want to have a back up plan in case your credit lines get yanked from you.

CARD Act will not prevent any credit limit decreases – While CARD Act makes it harder to increase interest rates, it does not address the issue of credit card issuers cutting your credit lines. Many times, that hurts folks more. Sometimes it hurts directly for business owners who use their credit cards as their sole source of line of credit. For other folks, a decrease in credit lines can mess up your debt utilization ratio and lower your credit score.

CARD Act – A good bill, but some questions still unanswered – Overall, I think that the CARD Act is a great piece of legislation that protects the consumers from many of the tricks that credit card issuers used to have up their sleeves. The legislation could have covered more areas and leaves some questions unanswered. But I support the bill and I think consumers will be better off than before.

Tags: cc act, credit card laws, new cc laws, the credit card act