By Jamye Durrance
For Hometown News
VOLUSIA COUNTY - When Johnnie George's daughter Shanya was born three years ago, the Daytona Beach resident wanted desperately to buy a house for his new family.
So he contacted the Central Florida Community Development Corporation, a non-profit organization that offers home buying assistance and credit counseling, because Mr. George, 34, knew he was going to have a problem purchasing a house.
Why? The same reason millions of American get into financial difficulties - credit card debt.
Mr. George said he had made some credit card purchases that quickly escalated in cost because of high interest rates and exorbitant fees. He had trouble repaying the debt, which only added more fees and interest. It was a vicious cycle he could not get out of until he made that call to get help.
"For me, I wanted to invest in something; in a home," he said. "That's what motivated me. When I saw my (credit improve) it really was an accomplishment for me."
Now, Mr. George has nearly nonexistent debt thanks to hard work and extensive cutbacks in his life and spending.
But he is in a small minority of people who have been able to climb out from under the heap of variable interest rates and exorbitant fees of credit cards.
By the end of 2008, Americans had racked up $927 billion in credit card debt, according to a study by the Nilson Report, a financial journal. Nearly $20.5 billion of that debt will be made up of penalty fees, according to a New York Times article.
Those statistics and the longtime war cry from consumer protection groups for credit card regulation overhaul prompted the U.S. Congress to pass the Credit Card Accountability Responsibility and Disclosure Act of 2009, which was signed by President Barack Obama in May. While some provisions of the law went into effect in August, the majority will take effect in February 2010.
The act, known as CARD, will regulate many aspects of how credit card companies treat the more than 170 million credit cardholders in the United States.
From the various junk mail solicitations guaranteeing "a low APR!" to when your payment is due, just about everything within the credit card industry will be affected.
"It's a fundamental rewrite of the model," said Peter Garuccio, spokesman with the American Bankers Association, which worked closely with legislators on the law.
Experts agree that the credit card industry will never be the same again.
Rates and fees
CARD makes changes to the way credit card companies operate, prohibiting them from raising rates without notice: they will have to give 45 days notice of any rate changes and promotional rates have to last at least six months.
The law also reduces or prohibits many of the overdraft or late fees the companies charge.
"It's a watershed bill," said Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies, a national association that represents non-profit credit counseling companies. "This is the first time we were able to get legislation passed to protect consumers (from the practices) credit companies have used for years."
But, opponents of CARD argue that those practices are what keep the system going and changes will adversely affect millions of Americans.
"We will see a reduction in the access to credit," Mr. Garuccio of the American Bankers Association said. "The recession is the worst time to constrict credit. Credit cards serve as a lifeline to a degree (for many people)."
Mr. Garuccio said the credit card industry works based on risk, much like the insurance industry: those with a high risk pay more than those who are safer.
But, because credit companies won't be able to adjust rates to "high risk" users like they can currently, that means trouble for everyone, Mr. Garuccio said.
"We're changing customer risk (with this new law)," he said. "The net effect is that all of us pay a little more."
Josh Frank, a senior researcher at the North Carolina-based Center for Responsible Lending, disagreed.
"(The constriction of credit) was already taking place before the law," he said. "The law still lets them set (rates) where they want to. It just requires (them to be) more transparent and up front."
Young adults and credit
Another restriction included in the law is the solicitation by credit card companies to those under the age of 21. That means the days of credit card companies camping out on college campuses, handing out free T-shirts may be gone.
According to a report by Sallie Mae, 18- to 24-year-olds carry more debt than ever before and as a group, are most likely to be the focus of manipulative and even predatory practices by credit card companies. They are also the most likely to not make payments.
Mr. Garuccio said anyone over 18 should have the right to have a credit card.
"People under 21 are adults," he said. "People over 18 can enter into contracts, get married, etc. but they can't get a credit card? The impetus (for this provision in the law) was the college student market. But not everyone is a college student. You are cutting off credit for some people."
Mr. Frank said the new restrictions will help.
"There really was a problem," he said. "There really has been a trend with them (young people) getting into trouble because of the aggressive marketing."
The factor of debt
According to the Nilson Report study, the average outstanding credit card debt for households was $10,679 at the end of 2008. That was a slight increase from the previous year when it was $10,637, the report found.
Mr. Jones, with the national credit counseling association, said that indicates people are having a hard time keeping up because of the practices by credit card companies.
"It's still very difficult for people to make minimum payments," Mr. Jones said.
Changes to the industry combined with the reality check of a recession might be enough to help people get into the black rather than the red, he said.
"People are operating in a much more conservative mood," he said. "This serves to be instructional. People are not spending as much on unnecessary purchases."
Requirements in the new law address the fine print disclosures that come with new credit cards and in monthly statements. Card companies will now be required to outline a schedule illustrating the effects of paying the minimum monthly payment as well as listing the interest and fees paid year-to-date.
Both sides can agree that seeing that will spark some reaction from consumers.
"It makes everything user-friendly and easier to read," Mr. Garuccio said. "Seeing those will make people reconsider. What could I do with that money?"
Mr. George was one of those people.
After going through credit counseling he got rid of all of his credit cards except one.
Even though he's armed with the right knowledge now, Mr. George said it is easy to fall back into the trap.
"I pretty much stay away from credit cards now," he said. "It's still a job (to keep up with finances). I feel so much better, which is good right now with this economy."
Credit Card Accountability Responsibility and Disclosure Act of 2009:
The Credit Card Accountability Responsibility and Disclosure Act of 2009 contains several provisions that will regulate how credit card companies operate:
Prohibits card companies from raising rates retroactively unless a cardholder is more than 60 days late, a promotional rate has expired or the rate is adjustable
Requires card companies to give 45 days notice of all interest rate increases or other changes (up from 15 days)
In that same notice, company must inform the card holder of their right to cancel the card if they do not like the new terms and allow the card holder to pay off the balance under the old terms (but company does have the right to raise the minimum payment due)
Promotional rates must last at least six months
Cannot increase the APR during the first 12 months after a new account is opened
Prohibits over-the-limit fees unless the cardholder consents to the over-the-limit transaction beforehand
Requires card companies to apply payments in excess of the minimum payment first to the balance with the highest rate of interest
Double-cycle billing, in which card issuers use the previous month's balance to calculate interest charges for the current month, is prohibited
Card companies cannot charge fees to pay bills by mail, phone or online
Requires the payment due date to be the same each month (the next business day if that falls on a weekend or holiday).
Requires each statement to be mailed no later than 21 days before the due date
Revises and expands requirements for minimum payment disclosures the company must furnish
Limits the amount of credit for those under 21 who don't have a co-signor
Restricts agreements between colleges or universities and credit card companies
Prohibits expiration dates on gift cards as well as imposing fees for not using them
- www.whitehouse.gov and www.credit.com