Credit card users can expect the most dramatic changes in credit terms, interest rates and fees in decades now that a new federal credit card law has gone into effect.

The new normal for credit cards is more transparency and easier-to-understand terms, but at a higher upfront cost. Credit card issuers and credit industry analysts say the credit card reform law could make credit cards more costly for all users and unaccessible for many low-income families and people with bad credit. The law likely means the return of routine annual fees, fewer rewards cards and the possibility that credit card bills could be payable immediately rather than after a monthlong grace period.

The new normal
President Obama signed the Credit CARD Act of 2009 into law May 22, 2009, following passage days earlier in the Senate and the House. (Read the act.)

What does the credit card law mean for cardholders? Millions of credit card users will avoid retroactive interest rate increases on existing card balances and have more time to pay their monthly bills, greater advance notice of changes in credit card terms and the right to opt out of significant changes in terms on their accounts. That will take the surprise out of "gotcha" fine print and give consumers time to shop around for better deals if they don't like the new terms. The new requirements were phased in over a 15-month period. The first batch of new credit card protections took effect Aug. 20, 2009, and the majority of provisions started on Feb. 22, 2010, while the final batch began Aug. 22, 2010.

The Federal Reserve issued rules and detailed guidelines for implementing each phase of the new credit card law. The law has fundamentally changed the way credit card issuers market, bill and advertise credit cards.

Here are the highlights of the credit card law:

Limited interest rate hikes: Interest rate hikes on existing balances are allowed only under limited conditions, such as when a promotional rate ends, there is a variable rate or if the cardholder makes a late payment. Interest rates on new transactions can increase only after the first year. Significant changes in terms on accounts cannot occur without 45 days' advance notice of the change.

Limited universal default: "Universal default," the practice of raising interest rates on customers based on their payment records with other unrelated credit issuers (such as utility companies and other creditors), has ended for existing credit card balances. Card issuers are still allowed to use universal default on future credit card balances if they give at least 45 days' advance notice of the change.

The right to opt out: Consumers now have the right to opt out of -- or reject -- certain significant changes in terms on their accounts. Opting out means cardholders agree to close their accounts and pay off the balance under the old terms. They have at least five years to pay the balance.

Limited credit to young adults: Credit card issuers are banned from issuing credit cards to anyone under 21, unless they have adult co-signers on the accounts or can show proof they have enough income to repay the card debt. Credit card companies must stay at least 1,000 feet from college campuses if they are offering free pizza or other gifts to entice students to apply for credit cards.

More time to pay monthly bills: Under the credit card law, issuers have to give card account holders "a reasonable amount of time" to make payments on monthly bills. That means payments are due at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or are moved up, giving them less time to pay their bills and increasing the likelihood of late fees.

Clearer due dates and times: Credit card issuers are no longer able to set early morning or other arbitrary deadlines for payments. Cut off times set before 5 p.m. on the payment due dates are illegal under the new credit card law. Payments due at those times or on weekends, holidays or when the card issuer is closed for business are not subject to late fees.

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. Common practice in the industry had been 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.

Limits on over-limit fees: Consumers must "opt in" to over-limit fees. Those who opt out would have their transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees cannot exceed the amount of overspeding. For example, going $20 over the limit cannot have a fee of more than $20. 

No more double-cycle billing: Finance charges on outstanding credit card balances must now be computed based on purchases made in the current cycle rather than going back to the previous billing cycle to calculate interest charges. So-called two-cycle or double-cycle billing hurts consumers who pay off their balances, because they are hit with finance charges from the previous cycle even though they have paid the bill in full.

Subprime credit cards for people with bad credit: People who get subprime credit cards and are charged account-opening fees that eat up their available balances get some relief under the new credit card law. These upfront fees cannot exceed 25 percent of the available credit limit in the first year of the card. Instead of charging high upfront fees, some issuers are considering high interest rates on these high credit risk accounts.

Minimum payments: Credit card issuers must disclose to cardholders the consequences of making only minimum payments each month, namely how long it would take to pay off the entire balance if users only made the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they want to pay off their balances in 36 months, including the amount of interest.

Late fee restrictions: Late fees are capped at $25 for occassional late payments; however, the fees can be higher if cardholders are late more than once in a six-month period.

Gift cards: Gift cards cannot expire sooner than five years after they are issued. Dormancy fees can only be charged if the card is unused for 12 months or more. Issuers can charge only one fee per month, but there is no limit on the amount of the fee. 

Law doesn't cover everything
Consumers should take note: Although the reforms are the most dramatic changes in credit card laws in decades, they do not protect card users from everything. Issuers can still raise interest rates on future card purchases and there is no cap on how high interest rates can go. Business and corporate credit cards also are not covered by the protections in the CARD Act. If credit card accounts are based on variable APRs (as the majority now are), interest rates can increase as the prime rate goes up. Credit card companies can also continue to close accounts and slash credit limits abruptly, without giving cardholders advance warning. Many banks are already finding ways around the law and launching new fees not specifically banned by the credit card reform law.

See related: Final Credit CARD Act changes take effect Aug. 22, 2010, Credit card reform and you, Obama signs new credit card bill into law, Interactive time line: The road to credit card reform and future effective dates of the law, Annual fees return in credit card mail offers, Regulators issue sweeping new credit card rules, What the new credit card rules don't cover, Interactive look at what new monthly credit card statements would disclose, Regulators will vote on new credit card rules, House passes Credit Cardholders' Bill of Rights, Fed backs rules to curb deceptive credit card practices, Fed moves to close timing loophole in credit card payments, New credit card rules don't cover business, corporate credit cards, Feds: Close rate-hike loophole in new credit card rules, Have you been 'rate-jacked'?, Fed caps credit card late fees at $25

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