Extended Grace Period of the Credit Card Act: Blessing or Curse?

Since the beginning of the current economic recession, congress and financial institutions have struggled to stem the seemingly unstoppable onslaught of defaulted credit cards and consumer declared bankruptcy. Prior to the recession, credit cards and their issuers were infamous for extremely discreet charges and requirements when people applied for a card. Once the card was issued to the consumer, the issuer could place extremely restrictive grace periods and staggering interest rates on the card user causing monthly payments to rise. When the consumer wanted to cancel their cards, they would be hit with various cancellation fees, making it incredibly difficult to cancel a card. In order to prevent abuse on the issuers hand, congress enacted the Credit Card Act in hopes of lessening the burden on consumers.

According to recent media reports, there has been a marked deterioration of individual credit scores. While many are puzzled by this state of affairs, US Congress is the cause. The Card Act became effective on February 22, 2010. While it was a well intentioned piece of legislation, and it has helped protect consumers in certain situations, as usual there are unintended consequences. Prior to the Act's passage, it was up to the Card Issuer's discretion when payment would be required. For example, if the statement/due date was the first of the month, many issuers gave customers just 15 to 18 days to pay the balance (grace period). Payment during within that period helps consumers to avoid interest and late payments. And many people pay their bill on the last day. The Card Act changed all that. Lenders are now required to allow at least 21 days grace before interest and or penalties kick in.

Those consumers paying their bill in full each month, paid them several days earlier prior to the passage of the Card Act. As a result, their average card balance was lower, because consumers had less time before payment to make additional charges. Since February 22, 2010, card balances have actually increased as a result of the extended grace period. On average consumers have 3-5 more days to wrack up charges on their cards before payment of their last month's charges is posted.

Credit repair professionals understand that a major component of an individual's credit score is the usage ratio. This is determined by taking average balance per card and dividing it by the credit limit. On a $1000 card limit, with an $800 balance, means there is an 80 percent usage ratio. Also factored into the score is the aggregate usage ratio, the combined balance of all a consumer's cards divided by the combined credit lines. In general, the higher the usage ratio, the lower the score. Effectively, longer grace periods equal higher balances which result in lower scores.

This phenomena has been found commonly by many debt consolidation firms since around February; the time of the bills passage. The average consumer has often suffered a 20 to 30 point decline in their scores as a result of this anomaly. In calculating FICO scores, grace periods are not considered. This could be a major reason why the drop in credit scores has occurred this year. It certainly warrants further study. In addition, consumers need to be made aware that paying their bills at the earliest possible date, in full--if doable, can result in an almost immediate score increase.

Fed Info on Credit Act-http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.html

What the Credit Card Means to You [Consumer]-http://www.creditcards.com/credit-card-news/help/what-the-new-credit-card-rules-mean-6000.php