New credit card rules

Starting Thursday 8/20/09, when the first phase of the new Credit Card Accountability, Responsibility and Disclosure (CARD) Act goes into effect, credit card users will be armed with a new right to say no to -- that is, opt out of -- interest-rate increases and other changes in their credit card agreements.

Under the first phase of the new law, consumers must be given:

• At least 45 days' warning of changes to their credit card accounts. Currently, only 15 days' notice is required unless customers default on their accounts, in which case interest-rate increases can go into effect immediately.

• At least 21 days to pay their monthly credit card statements without threat of late fees.

• The right to opt out of interest-rate and fee increases and the right to cancel their accounts while paying off the balances under the old, lower interest rates. Currently, issuers offer opt-out options at their discretion, and it is not a consumer right.

• Highest interest balances paid first:

  When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first.

  Current industry practice is to apply all amounts over the minimum monthly payments to the lowest-interest balances first -- thus extending the time it takes to pay off higher-interest rate balances.

Other aspects of the new credit card law -- such as restrictions on interest-rate increases, bans on issuing and marketing credit cards to young adults, and regulations on gift cards -- take effect in February 2010 and later. In addition, starting July 1, 2010, a host of requirements for disclosing fees, rates and terms on monthly statements, credit card applications and mailers will become law as a result of new rules drafted and approved by the Federal Reserve Board and other banking regulators.

More details on the new opt-out rules

Other provisions that got into effect Thursday include:

• Credit card issuers must inform card users of the right to cancel when they mail a 45-day notice of a change in terms. The notice must explain the steps cardholders can take to exercise their right to cancel, including a toll-free number to call and a deadline for opting out.

• Opting out means a consumer can no longer make purchases with the card. Instead, the old, lower interest rate or fee will be applied while the consumer repays the balance.

• There are exceptions to the opt-out rule. Consumers cannot opt out of increases in minimum-payment amounts.

• Another major exception is variable-rate credit cards, whose rates are tied to an index -- almost always the prime rate. When the Federal Reserve raises interest rates, it raises the prime rate. Those increases are passed on to variable-rate cardholders; no opt-out is allowed. In recent months, card issuers have reacted by switching consumers from fixed-rate cards to variable-rate cards.

• Consumers who are more than 60 days late making payments do not have the right to reject rate increases.

• Reductions in credit limits cannot be rejected by any cardholders.

• Issuers cannot demand payment in full of outstanding balances or charge monthly maintenance fees on closed accounts if consumers reject changes in terms.