How do the new credit card rules affect you?

By Jim Sloan

In recent months Americans in general have been making a determined effort to pay down their credit card debts. Maybe you've been part of this, changing your spending habits, and using your paycheck to pay down your credit card debt along with your student loans. That effort will only be helped by new legislation passed last year to combat some of ham-fisted habits of credit card companies.

How do these new regulations affect you?

New financial regulations to limit customer exposure to fees and rate hikes

New restrictions on credit card companies--and credit card users, for that matter--come from a combination of the 2009 Credit Card Accountability Responsibility and Disclosure Act and new Federal Reserve regulations mandated by the law. The Fed's rules, according to the law, must make sure that late charges and penalties--a major source of taxpayer headache and credit card company income in recent years--are "reasonable and proportional." The rules apply to many types of credit cards, from high interest credit cards to zero balance transfer cards to even the best cash back credit cards.

Just how effective the new law and regulations will be remains to be seen. But as a consumer, it's important for you to keep in mind what your rights are.

Credit cards and credit scores

Some of the new regulations are related to not only to credit cards but also to your credit scores. Here's what you have coming to you:

• Each year you can get a free copy of your credit report from each of the three major credit bureaus--Equifax, Experian and TransUnion--at AnnualCreditReport.com.
• If you get turned down for a mortgage, credit cards, insurance policy or an apartment because of your credit score, or if you're charged a higher premium, you have the right to ask for a copy, for free, of the credit score that did you in. You can then check it against your free FICO credit score to understand what happened.

A new sheriff in town

Your credit card company--as well as your bank, mortgage lender and student loan company--will have to obey rules set out by the new Consumer Financial Protection Bureau. Your auto dealer, however, won't report to the bureau. But retailers will have to follow certain rules, such as:

• Merchants who set a minimum amount for credit card purchases now have the freedom to continue to do so, provided the minimum isn't higher than $10. So learn to carry some cash. The Federal Reserve can raise the minimum if it wants to. Also, the federal government and universities can limit how much you put on your credit card.
• Merchants can provide incentives to people who pay in cash or use a debit card instead of credit cards. Previously, contracts with credit card companies prevented that, even though increasing credit card charges made goods more expensive for everyone. Now when a merchant saves on those credit card charges when you pay with cash, you may get to share in the savings.
• Merchants won't be able to charge less for people using one type of credit card than people using another. And they can't give discounts for certain banks that issue debit or credit cards.

Credit card penalties and interest rates

Credit card companies will be on the lookout for new ways to recover the profits they are losing to the new regulations, so you should be on the lookout for them. One example is Alliance Data Systems, which issues private label cards to specialty merchants. Alliance made a lot of money penalizing its customers, so when the new rules went into effect, it announced a $1 monthly surcharge on customers who want to get an account statement by mail.

The start of something big? It's hard to say. But in the meantime, here's what your credit card company can and can't do:

• Credit card companies can't raise interest rates on your account for at least 12 months after the account is opened. After that, a higher rate only applies to your new changes, not an existing balance.
• People who are late on their credit card payments are still going to face some stiff penalties; card companies can still double or even triple your interest rate if you fall behind on payments by as little as two months. They have to give you 45 days notice, however, before raising your rates.

The new rules also bar companies from issuing cards to minors without establishing their ability to pay or getting the co-signature of an adult.

Late fees can no longer exceed the amount of the payment due and can't be higher than $25 in one month unless one of previous six payments was late or the company proves your tardiness cost them the amount they're asking.

Where should you go from here?

If you're just starting out after college in the midst of these regulatory changes, the best advice out there is to live below your means and pay down your credit card debt. Trust me--this temporary sacrifice will save you lots of financial heartache in the future.