Federal Reserve is helping consumers understand the agreement they entered with credit companies by rephrasing terminologies in plain language.
Jeanne Hogarth, manager of a division of the federal agency, said they found out in their studies that there are terminologies in the contract, especially when it comes to interest rates and fees, which are incomprehensible to cardholders.
She said the agency's website and other credit companies are now taking measures to explain terms clearly.
Hogarth cited the word "grace period," which only few of the consumers understand that this is a period allowed to pay debt without penalty.
Consumers will be properly informed about the contract, interest and other fees that could be exacted from them through paraphrasing the terms.
Hogarth added that making card holders understand the contract by simplifying words used therein will help them be cautious in using credit cards.
She said credit card firms or companies are also including the explanation in solicitations, clearly discussing interest rates and annual fees involved.
Hogarth encouraged cardholders to carefully read mails that will be sent to them by credit card companies or firms this coming December, when the Credit Card Reform Act is implemented. She explained that banks and lenders will enclose a new payment plan, which will give details to consumers or card holders the length of time they have in order to fully pay balances. It gives consumers an option with regards to the duration they prefer in paying debts off.
Choosing the long period of time to settle the debt is cheaper, but if it is summed up, consumers or card holders will incur more interest. The short-term payment has higher monthly fee, but less interest will be charged to card holders.
According to Hogarth, this newly-enacted credit card reform act has prompted banks and loan companies to rewrite and revise their policy, especially rules on interest rates, annual fees and other policies.
Banks and loan companies' power to increase interest rates and fees will be restricted once this new credit rule is implemented.
Congress, in passing this credit reform act, gave consumers and card owners the right to decline rate increases that will be imposed by banks and card issuers.
However, Hogarth clarified that such privilege only applies to consumers who are paying off their balance and not using the card.
The law also allows increase in interest rates if the borrowers are 60 days late in their payment. If the debt was paid within six months, the initial interest rate shall be applied again.