Don’t look now but a funny thing is happening to the plastic in your wallet: It’s getting safer and easier to understand and use—at least if you’re the right type of customer.
The final stages of credit-card reform went into effect recently, capping a two-year process that was designed to eliminate sneaky fees for everything from exceeding your spending limit to simply not using your cards.
The most recent provisions will reduce late fees for all but the most pernicious procrastinators and give those who’ve been hit with penalty fees a chance to redeem themselves. In addition, the new rules will eliminate a profusion of fees that could eat up the value of some gift cards before recipients had a chance to use them.
But credit-card interest rates are rising, so people who carry a balance on their credit cards are likely to pay more.
“The idea behind credit reform was to make the market more fair,” said Gene Truono, a former credit-card executive who is now managing director of BDO Consulting in New York. “But the only way cardholders can use that to their advantage is to handle their credit responsibly, charging no more than they can afford to pay and pay on time.”
The biggest changes affect gift cards—and, happily, they’ll be in effect for the holiday shopping season.
Gift cards issued by retailers were already protected in California, which doesn’t permit expiration dates and fees that could drain a card’s value.
But until last week, bank gift cards—which can be used in a variety of stores and carry the imprints of credit-card companies such as Visa, MasterCard and American Express—could come with a host of fees. A card’s value could be docked if it was not used up within a certain time period. Some bank cards even charged for phone calls to customer service.
As of last month the only added charge that can be placed on bank gift cards in the first 12 months of use is a purchase fee at the point of sale. Typically, this charge will range from $1 to $5, according to Jennifer Tramontana, a spokeswoman for the Network Branded Prepaid Card Association.
If the issuer of a bank gift card intends to charge fees after that, information about those fees must be prominently displayed on the card itself, along with a toll-free number for questions plus a Web address.
To give retailers time to use up their current supply of cards, bank gift cards produced prior to April can be sold without the disclosures and Web address. But the retailer must disclose the costs in other ways, either by providing prominent signage at the point of sale or placing stickers on the cards.
Bank gift cards cannot expire in less than five years, according to the new rules. And issuers also are banned from charging more than one fee in a month.
Importantly, in states where legislators have passed more stringent gift-card laws, the stricter laws apply. That means that Californians will still be allowed to get cash for bank gift-card balances of $10 or less, according to Bill Hardekopf of LowCards.com. And people buying gift cards in Hawaii can’t be charged post-purchase fees for at least five years, according to ScripSmart.com.
As for credit cards, users who have been hit with penalty rates may get some respite if they clean up their acts. The new law demands that if an issuer hiked rates on a cardholder after January 2009, the issuer must review the reasons for the hike every six months to determine whether the cardholder deserves a lower rate.
If the issuer raised rates for all its customers in response to souring market conditions, this review will help only if the market turns around. But if a user’s high rate was due to late payments, this review should result in a rate cut within six months if the cardholder has paid on time.
The catch, Hardekopf said, is that card issuers are the ones who will determine whether a rate cut is “appropriate.” That means there are no guarantees.
Finally, card issuers are barred from assessing “inactivity” charges and must set the price of penalty fees—such as for late payments—at a rate that reflects the cost.
What that means in practical terms is anyone’s guess, Truono said. Since there is no information available to show the actual cost of handling late payments, Truono expects issuers to fall back on the new law’s “safe harbor,” which generally caps penalty fees at $25 per occurrence. That’s $10 to $14 less than the previous industry standard.
The only exception is when someone has paid late more than once in the last six months. In those cases, issuers can charge up to $35, Truono said.
The flip side? In preparation for losing revenue from penalty fees, issuers have been hiking rates. The average interest rate charged on credit cards rose to 14.7 percent last quarter from 13.1 percent a year ago, according to market research firm Synovate.
“If you carry a balance, you’re probably going to be paying more interest,” Hardekopf said. “It’s always been smart to pay your balance off every month, but it’s getting even smarter.”
Kathy Kristof’s column is syndicated by Tribune Media Services. She welcomes comments and suggestions but regrets that she cannot respond to each one. E-mail her at firstname.lastname@example.org.