You might have noticed your credit card statement looking a little different recently thanks to the Credit CARD Act of 2009.
The new rules should also help consumers repair their credit score by making credit-card statements more clear and encouraging to people pay down high bills.
Here’s what you need to know about your credit score and the new regulations.
Credit score 101
Your credit score can range between 300 and 850 and determines your level of risk in borrowing money and likelihood of your ability to repay debt. The higher the score, the better your chances of getting attractive interest rates on loans.
Hubert Rivera, vice president of Consumer Outreach at InCharge Debt Solutions explains the main components that make up a credit score as follows:
- 35%: Credit performance: history of making payments on time
- 30%: Credit utilization: balance vs. how much available credit
- 15%: Length of credit history
- 10% Type of credit:
- 10% New credit: the more you try to seek credit with your amount of credit risk
What the laws change for the lenders
Say goodbye to vague and confusing language about changes to your credit-card contracts.
“In general, we are going to see lenders having to be much more explicit about what they mean and their contracts will be made much [simpler],” says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies [AICCCA].
“They have to be very clear, not only in the agreements that they ask people to sign, but also in the way they respond to consumers’ questions,” explains Jones. “If they expect to raise somebody’s interest rate, they have to be very forthright about that and they have to give plenty of notice to the consumer.”
The new law requires explicit and advanced notices on any changes to rates and fees as well as a description on bill statements of how long it will take to pay off any debt.
Lenders must also now print credit counseling organization phone numbers on the statements to give consumers easy access if need be.
“The consumer can really take advantage of this because they can call these numbers and these counseling sessions are free,” says Rivera.
Other conditions of the credit card law include:
- Balances with the highest interest rates will be paid off first
- No double billing cycle (credit card companies can only require finance charges to be calculated into interest on balances in the current cycle rather than include charges from the previous billing cycle as well)
- No interest rate increases during the first year of an account
- Restrictions on over-the-limit transactions (unless you notify the company that you want to be able to make over-the-limit transactions).
- Cap limits on high-fee cards
- Restrictions on underage consumers (if you’re under 21 years of age, you will need a co-signer or proof of sufficient income).
The new law also gives consumers more time to make payments and creditors must deliver bills at least 21 days before the bill is due.
“[The new rules] help the consumer make the payment and not default,” says Rivera. “Any time that you pay off your credit card, the sooner [you pay it off], the better effect on your credit score.”
What the law changes for consumers
The new requirements, according to some experts, also make it more difficult to obtain new credit, which accounts for 10% of your credit score.
“It is already much harder to get a credit card than it was in the past with a completely new set of standards,” says Jones. “Also, there is the young consumer that is trying to built their credit, whether they’re about to start a family or want to build their credit history, it is going to be particularly hard for them.”
The law encourages you to improve your credit health by including a “debt box” on each statement. The box displays how long it will take to pay off the entire balance if the cardholder makes the minimum payment compared to how long it might take to pay it off when making higher payments.
If your credit is not so great and you want a way to use credit--but in a more controlled environment, says Howard Dvorkin, founder of Consolidated Credit Counseling Services and author of Credit Hell – How to Dig Out of Debt.
Dvorkin recommends secured credit cards, which are secured with a deposit in a bank account or against an insurance policy in case of default.
Rivera explains that although this can be a good option, you need to stay on top of your payments. “You [can] start using it for your everyday purchases--the difference is that you want to make sure that you’re paying it off as you use it,” he says. “You don’t want to have a balance on this card.”
One aspect of credit that will never change: self-accountability
The only way of improving your credit score is through your own actions and to limit your use of credit.
“[You] need [a credit card]…with low interest rate with no fees that you can use for emergencies only,” says Dvorkin. “Rather than putting a portion of your life on there that you can’t afford, you need to just make the payment one time and not run up a balance.”
Make sure that you keep tabs on your score and investigate if something doesn’t look quite right. “Pulling your credit report at least twice a year will definitely help,” says Rivera. “80% of credit reports have at least one or more errors, and what’s interesting is that in 25% of those credit reports, the errors are so severe that it will result in credit denial.”