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Rates up despite Credit CARD Act

By Leslie McFadden · Bankrate.com
Monday, August 23, 2010
Posted: 4 pm ET

The third batch of provisions from the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) of 2009 took effect Sunday. The new rules limit penalty fees on credit cards, require evaluations of rate increases every six months and extend the life of gift cards. The CARD Act has been rolling out in stages from last year through 2010. In February, the biggest phase took effect. Universal default on existing balances came to an end, as did the practice of applying payments above the minimum to lower-rate balances first.

Though the law requires issuers to notify customers 45 days in advance of most rate increases and restricts increases on existing debt, it doesn't cap interest rates or ban issuers from raising rates for any reason on future transactions.

Issuers haven't failed to use this remaining freedom. The Wall Street Journal reported this morning that credit card rates have reached their highest level in nine years. In the second quarter, the average interest rate for existing credit cards rose to 14.7 percent, the highest average since 2001, according to research firm Synovate.

Another disturbing trend was highlighted in the July 2010 report from the Pew Safe Credit Cards Project: the disappearing disclosure of penalty interest rates. Almost 95 percent of bank credit cards have penalty rate terms, but nearly half of them no longer disclose the amount of the penalty APR. Among the cards that disclosed it, the median penalty APR was 29.99 percent.

As of Aug. 22, issuers must provide a reason for increasing your rate, and re-evaluate that rate increase every six months to determine if a reduction is warranted. The law doesn't mandate a specific decrease in rate.

If you're facing a huge rate hike and have a good credit score, you might want to consider a balance transfer card. The CARD Act also gives you the right to opt out of certain rate hikes, which freezes the rate on existing debt but may result in a closed account and increased minimum payment.

For more information on the CARD Act, subscribe to Credit Card News.

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6 Comments
Greg
August 25, 2010 at 9:25 am

I find it disconcerting that in the 21st century, people are still indignant about banks setting their own rates for providing the consumer with potentially thousands of dollars of unsecured credit. While you really can't get along very well in the modern world without plastic, no one forces you to spend beyond your means. If you pay your balance each month, your effective rate is 0% -- and if you take advantage of a rewards card program, that rate could actually become a negative number.

Shantique
August 24, 2010 at 8:06 am

Is it really surprising that credit card companies took the nice, long warning time to ramp up interest rates? The government basically said "if you want raise rates to ridiculous levels (while the rates you pay are at historical lows) and make your customers economic lives even more difficult, you better do it in the next YEAR before we put these laws in effect". Great protection for consumers! We really appreciate it!

michele foran
August 23, 2010 at 9:23 pm

The following provision exception seems to hurt consumers. It forces credit card companies to not give the consumer his delayed interest for the last 2 months of the promotional period:

(I personally think the bill was written with some unintended error)

# Payments directed to highest interest balances first. If you make more than the minimum payment on your credit card bill, your credit card company must apply the excess amount to the balance with the highest interest rate. There is an exception:

* If you made a purchase under a deferred interest plan (for example, "no interest if paid in full by March 2012"), the credit card company may let you choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, the credit card company must apply your entire payment to the deferred interest-rate balance first.