Confusing Provisions of the CARD Act

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The new credit law that went into effect in February established new and important consumer protection from credit card abuse. But when theory becomes practice, sometimes things can be a little fuzzy at first.

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The dust has settled, now that the Credit CARD Act has been in effect for over one month. But consumers and issuers are both finding some hazy areas in the new provisions. In some cases, this confusion was brought about by Congress not spelling out how these provisions were to be implemented.

Here are examples of some confusing elements of the CARD Act:

Limiting credit card offers to young adults under 21.

The CARD Act requires that young adults must have a job with enough income in order to be approved for a credit card, or they must get an adult to co-sign on the account.

“This is still a gray area of the CARD Act. Issuers have not yet specified a standard income level that is needed from the young adult to be granted approval. What proof of income has to be shown and how will it be verified?” says Bill Hardekopf, CEO of and author of The Credit Card Guidebook.

Several issuers have added some questions regarding income on their online applications.

Citi student applications ask: “Do you have a checking account, savings account, money market account? What is your yearly income including wages, stipends, scholarships and grants? Do you have any outstanding loans?”

Bank of America now includes this statement: “Federal Law requires that we collect income information to determine your ability to pay. If you do not have income, we may request a guarantor.”

“Even the ‘may request a guarantor’ in this statement makes the provision a little less concrete,” says Hardekopf.

Proof of income.

This is now required on new credit applications. Consumers must prove their ability to make required payments before they can open a new credit card account or increase the credit limit for an existing credit card account. Congress did not provide guidelines on how to verify income.

“We are still waiting to see how issuers will find a solution that quickly and efficiently handles income verification. This is a good idea, but it slams the brakes on instant credit, and retailers are protesting that a delay in approvals will hurt sales. In the past, instant approval for a credit card was based on your credit score and customers were able to both apply and shop on the same day with that credit,” says Hardekopf. “Issuers aren’t told how to do this. Will it be the honor system where consumers fill in the income line on the application and that is good enough?”

Issuers must provide a toll-free number for credit counselors in the monthly statement.

When cardholders call the number, the issuers must give a name, phone number and address for at least three organizations that have been approved by the U.S. Treasury or a bankruptcy administrator.

Bankers and the American Bankers Association were against this provision because it would give the appearance that banks endorse specific credit counselors. The credit counseling industry has had problems with a few dishonest agencies and banks want to distance themselves from this as well as avoiding any suggestion of favoritism and a risk to their reputation.

Each issuer handles this recommendation differently. Some stay out of it as much as they can, giving a list with all 158 approved agencies. Citi refers inquiries to three specific nationwide agencies with which it already has a strong relationship.

“This is still a good provision for consumers with severe debt problems because it can help them find a reputable debt counselor. However, if credit card debt is a significant issue, we recommend that you first try to work out a debt settlement with your credit card issuer,” says Hardekopf.

Fairer distribution of payments.

The CARD Act requires a different distribution of payments. The minimum payment is still applied to the balance with the lowest interest rate. If a cardholder pays more than the minimum payment, the remainder will be applied to the balance with the highest rate.

“If you carry a balance, this can be a very helpful provision of the CARD Act. However, some issuers have doubled the monthly minimum from 2.5% to 5% during the past year for some cardholders. If your minimum payment has doubled, it may be difficult to pay more than the minimum payment and take advantage of paying off your debt at a lower rate,” says Hardekopf. “By increasing your minimum payment, issuers keep you paying the highest rate for a longer period of time. The CARD Act does not restrict issuers from raising their minimum payment requirement. Of course, the good news is that the more you pay on your balance, the faster you will pay off your debt.”

Stacy Johnson

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