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What the New Credit Card Law Means

More student protection, but many pitfalls remain

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In the video above, students get answers to their credit card questions from an expert, School of Law lecturer Richard P. Hackett.

For good and bad, easy credit is gone.

Not long ago, credit card companies lined campus sidewalks offering swag to those willing to sign on the bottom line. Presto! Students received their plastic in the mail and hit the stores.

Such industry promotions are now illegal, according to the Credit Card Accountability, Responsibility and Disclosure Act. Signed by President Obama last May, many of its provisions went into effect February 22.

The law is designed to protect consumers from predatory credit card lending practices, such as arbitrary interest rate increases or repeat over-limit fees that target less-than-savvy spenders and people without a steady income. Many college students fit that bill, and are paying that bill.

“The Credit CARD Act eliminates the industry’s ability, once consumers are in the deal, to stick them with something they can’t avoid,” says Richard P. Hackett, a lecturer in the School of Law’s Graduate Program in Banking and Financial Law and a partner at the law firm Pierce Atwood, LLP.

Many industry tactics were spelled out previously in very fine print that cardholders failed to read. “There’s a certain amount of consumer laziness that caused some of the unhappiness,” Hackett says. “The new rules are about prohibiting practices that take advantage of that laziness.”

A look at key CARD provisions:

  • No credit cards can be issued to those under 21 without a cosigner or proof of ability to pay. Credit limits can’t be raised without a cosigner’s consent.
  • Card companies can’t give away merchandise on campuses to recruit students.
  • Colleges must disclose any agreements they have with companies marketing cards; companies must disclose their campus activities to the Federal Reserve.
  • Companies must send statements at least 21 days before the payment due date.
  • Statements must show how long it would take to pay off a bill if only the minimum is met; they must also say how much users should pay monthly to eliminate their balances within three years.
  • No interest rate hikes are allowed in the first year of credit card use.
  • Companies must give a 45-day notice to raise rates and fees. Customers can choose to deactivate their cards and pay off balances under current terms.
  • For a fee, cardholders can authorize companies to allow processing of over-limit charges. No repeat over-limit fees are allowed in one month.

Credit card companies responded to the new legislation by hiking interest rates in the weeks before the bill became law and imposing new annual fees.

“That’s not going well among consumers,” who have been canceling their cards and looking elsewhere, Hackett says. “There’s still competition out there.”

Credit cards used responsibly can be a great consumer tool and are not innately evil. When purchases are paid off monthly, cardholders use them as a “free 30-day loan,” explains Jeffrey Allen, an assistant professor of information systems at the School of Management. They also help build a good credit history, key to making bigger purchases later in life, like a car or a home.

But used unwisely, they can create financial burden. “They allow you to buy things with money that you don’t have to impress people you don’t even like,” Allen says. He advises coming up with a budget and setting limits on monthly credit card expenses. Once that limit is reached, put the card away.

Mark Passacantando (GSM’92), a Metropolitan College lecturer in administrative sciences, says one way to prevent unnecessary spending is to wait half an hour before buying something you see. Or, keep a monthly envelope of cash just for eating out. Once it’s empty, the party’s over.

For those in financial trouble, Passacantando recommends working with a financial planner or credit counselor, who can help create a strategy for tackling debt.

Credit card companies can be flexible by giving borrowers more time to pay bills, suspending interest rates, or even eliminating a portion of debt. “I always, always encourage somebody to negotiate; the worst they could do is say no,” he says. “Banks would rather get something than nothing.”

And if using plastic is just too tempting to resist, he recommends a drastic step, learned from a student: freezing the card. Several hours pass before it works again.

For more information about the Credit CARD Act, visit the Federal Reserve site or the White House fact sheet.

Leslie Friday can be reached at lfriday@bu.edu; follow her on twitter @lesliefriday. Nicolae Ciorogan can be reached at ciorogan@bu.edu.

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