August 20, 2009 in Credit Cards

New credit card law will impact terms

New credit card legislation recently signed into law by President Barack Obama will bring about sweeping changes in credit card policy. Many of the terms and conditions analyzed in our Credit Card exclusive will look substantially different once the Credit Card Accountability, Responsibility and Disclosure, or Credit CARD, Act takes effect in February 2010.

Using the same data points examined in our study, here’s a look at how terms and conditions on credit cards will change.

Raising rates: Under the Credit CARD Act, issuers must give you 45 days’ advance notice before any rate increase takes effect, as well as any other “significant” change in terms, such as fee increases. This section of the law goes into effect in August 2009. However, this notice requirement does not apply to rate hikes due to index movement, 60-day late payment, promotional rate expiration or failure or completion of a hardship agreement.

Variable-rate cardholders beware: An increase in the prime rate could push your rate higher, without any notice.

Issuers that increase the APR based on the cardholder’s credit risk, market conditions or other factors also have to consider those same factors to lower the rate and must review accounts every six months to see if those factors have changed since the rate increase.

Any time, any reason; universal default; etc.: Card companies no longer will be able to raise rates on existing balances unless one of four exceptions applies: The consumer is 60 days or more past due, a promotional rate expired, the consumer failed or completed a workout plan, or the variable rate increased due to index movement. If a late payment triggered the rate jump, after six months of on-time payments the issuer must reinstate the lower rate.

This ban puts an end to bait-and-switch tactics. Basically, the rate that you have when you make a purchase with your card is going to be the rate that’s applied to that amount forever,” says Emily Peters, a credit expert for San Francisco-based Credit.com. Rate increases not related to the four exceptions will only apply to future transactions, and not to any incurred before the rate increase took effect.

According to a recent White House news release, 44 percent of families carry a balance on their credit cards. That’s a big chunk of consumers who stand to benefit from this one provision.

In the meantime, some credit card issuers may continue to jack up rates while they can. “I think it’s not unrealistic to think that by the time this law is enacted that you could see average rates hovering around 15 percent,” says Curtis Arnold, founder of CardRatings.com in North Little Rock, Ark.

As of June 25, 2009, the average variable rate on credit card offers was 10.8 percent, according to Bankrate’s weekly survey of interest rates.

Average daily balance: In our survey, none of the issuers practiced double-cycle billing, a method of interest calculation based on the average daily balance for the current and previous billing cycle. The practice was banned under the new law.

Late fee: Penalty fees, including late fees, must be “reasonable” and “proportional to such omission or violation,” according to the legalese of the Credit CARD Act. What’s reasonable hasn’t yet been specified, and federal regulators are expected to set standards for penalty fees after this section of the law goes into effect.

Consumers will receive their statements at least 21 days before the due date, up from the current requirement of 14 days, allowing them more time to pay and avoid late fees.

The law also sets some rules for due dates and requires that they fall on the same day each month, and if that happens to be when the issuer doesn’t accept mailed payments, such as on holidays or weekends, then payments received the next business day can’t trigger late fees. If card issuers change the mailing address for payments, they can’t impose late fees if the adjustment caused a delay in crediting the payment.

So statements must disclose the late fee, payment deadline and any rate increase that will apply as a result of a late payment.

Payments made at local branches will count as payments made on that day.

Over-the-limit fee: Like late fees, overlimit charges must be reasonable to the offense. The law cracks down even further on overlimit fees and caps them at one per billing cycle.

Consumers will no longer be surprised by overlimit fees. The law mandates that issuers cannot charge consumers overlimit fees unless the cardholder has elected to let the issuer approve overlimit transactions. People without fixed limits can only be charged an overlimit fee if a transaction, not a fee or finance charge, pushes the cardholder over the limit. Cardholders can later cancel their election.

Arnold isn’t impressed by the notion of hard credit limits. He says he’s enjoyed fixed limits on his cards for years — by calling his issuers and asking them not to approve any transactions over the credit line. “Most of your issuers are going to honor that these days,” he says.

Balance transfers: The law doesn’t cap balance transfer rates or fees.

Promotional rates have to last for six months, and no APRs can increase the first year after account opening, unless one of the four exceptions for rate increases applies. Variable rates, for example, may change with index movement even inside of the promotional rate.

Arnold predicts that a year from now consumers will have a tough time finding a decent balance transfer offer. Zero percent balance transfer offers, with no transfer fee and a zero percent interest rate for six months or more, are going to cease to exist, he says.

Cash advance: The law doesn’t cap cash advance rates or fees.

Payment-related fees: Fees charged for processing payments over the phone, Internet, mail, electronic transfer or any other means will be banned under the new law except for “expedited service by a service representative of the creditor.” So you may still have to spend a few bucks to pay the bill through a live human being.

Other fees: The law does limit the fees charged on subprime cards. Issuers of these cards can’t use up more than 25 percent of the credit limit with nonpenalty fees during the first year after the account opening.

Other than that restriction, the Credit CARD Act doesn’t crack down on miscellaneous fees, leaving plenty of room for issuer creativity. “I have a feeling that they will find loopholes or they’ll find ways to impose fees,” says John Pachkowski, a senior banking analyst at CCH Inc. based in the outskirts of Philadelphia. “Just as long as they disclose them, they can add on something.”

Depending on whom you ask, annual fees are one such charge that consumers could see tacked onto their accounts.

Annual fees are already popping up on credit card offers. Solicitations for cards with annual fees increased in volume to 27 percent during the first quarter of 2009, up 9 percent from last year, according to Mail Monitor, the direct-mail offer tracking service from global market research firm Synovate.

Arnold contends that annual fees could show up on some rewards cards and other cards with low interest rates, but other rewards cards and most “plain Jane” credit cards will remain without annual fees. “I don’t expect mass annual fees to crop up overnight at all, nor in the next six months,” he says.

Grace periods: The law mandates that consumers receive their periodic statements at least 21 days before the due date. Payments cannot be considered late unless the bill was sent on time.

If there is a grace period, it must span at least those 21 days.

In our survey, we found that issuers offered a grace period of 20 or 25 days.

Intro rate for purchases: APRs on credit cards can’t increase for the first year after the account is opened. Exceptions include expiration of a promotional rate, termination or completion of a workout plan, a change in the index rate or a 60-day delinquency.

Default APR: The law doesn’t set a usury cap on default rates. However, it does say that closure or cancellation of an account cannot trigger the default rate. Balances on closed accounts are treated as existing balances. Issuers are prohibited from increasing the rate unless one of the four exceptions for retroactive rate increases applies.

Applying payments to balances: Bankrate found that all of the issuers surveyed allocate payments to balances with the lowest interest rate first before higher-rate balances.

The Credit CARD Act reverses this practice so that issuers must apply the payment first to the highest-rate balance, then to the next highest and so on until the payment is spent.

This provision will benefit those who accept a balance transfer or cash advance offer and then use the card to make purchases. Usually, these balances have different interest rates.

How rate is set: The law does not instruct lenders how to set rates.

Minimum payment due: Periodic statements will have to include a warning about the cost and increased repayment time if the consumer makes only the minimum payment each month. They must also explain how long it would it would take to eliminate the balance by making only the minimum payment each month, and what the total cost and payments would be if the balance were repaid in 36 months. Consumers will see a toll-free number they can call for information about credit counseling and debt management services.

This requirement is one of those attempts to legislate a nugget of financial literacy. Consumers should know that over time, minimum payments cost more than larger ones. Let’s hope cardholders learn this fact long before they discover the minimum payment warning.

See Bankrate’s study results.