Business Credit News

New Credit Card Rules

The Credit Card Act of 2009 (in effect as of February 22, 2010) will have a significant impact on small business owners. Many entrepreneurs use their personal credit cards to finance their fledgling startup businesses. While most of the changes are beneficial, other changes may have negative unintended consequences. The act addresses the following topics:

Over limit fees. Currently, credit card issuers typically allow cardholders to exceed their credit limit, but impose a financial penalty for each occurrence. Credit card experts say the penalty can be as high as $30 per transaction. The new rule allows the holder to continue exceeding card limits for a prearranged over limit fee, or the holder may opt out of that coverage. Should the holder opt out, the card company will not allow charges over the credit card limit.

Interest Rates. Some card companies charge different interest rates on different segments of the balance. The act requires all amounts paid over the minimum to apply directly to that balance that carries the highest interest rate.

Past policies allowed card issuers to change interest rates, and implement those changes with minimal notice. The new act requires a 45 day notice of interest rate or fee hikes, and any new cards received after February 22, 2010 will have the initial fee and rate structure locked for a year.

When the conditions to increase rates have been met the card issuer notifies the card holder of the increase. The card holder may then decide to accept or deny the new rate. The card holder should try to negotiate a lower rate, but if unable they may decline the new offered rate.

If the new rate is declined, the account will close even though the holder will have 5 years to pay off the balance by installments. If the new rate is accepted, the new rate will not apply to existing balances, but only to new purchases. There are exceptions that can negate the one year rate lock; those include financial workouts, going 60 days past due, and any preannounced and agreed upon variable rate term expiration.

Co-Signers. Card holders under 21 must have an adult co-signer or prove they have an income sufficient to pay credit card debt. Card companies are also prohibited from offering free incentives to enroll card applicants.

Due Dates. Card companies must use the same due date each month.

Additional Fees. Special fees for internet and phone payments are prohibited.

Ability to Repay Debt. Issuers are now required to consider the applicant’s ability to repay the debt incurred by issuing a new credit card account. The easiest way to determine repayment ability is to know the applicant’s income. In response, the Federal Reserve was asked to issue a ruling which states issuers may use a reasonable estimate of income based on statistically sound models. The issuers do not have statistically sound models, but the three big credit bureaus do. This will become a new sales offering by the credit bureaus. The bureaus use a data base of wages, interest and investment income estimates, total available credit, number and size of monthly payments, as well as a number of other factors.

According to the Wall Street Journal, Experian and TransUnion admit their income estimates can be off by as much as $15,000 to $20,000. They also state that 85% of their estimates of a $35,000 income will be below $50,000. Because of these inaccuracies, their contracts with card issuing companies state the earnings information cannot be the sole reason for a denial of credit. This aspect of the ruling will force more credit grantors to ask income oriented questions on credit applications.

Dave Von Holten
Co-Founder, Business Credit Services, Inc.

Tags: business spending, credit card act, credit requirements, lending requirements, small business lending