The Credit Card Accountability and Disclosure Act will be a real game-changer – for both banks and cardholders – when it takes full effect next month.
The law, which goes into effect Feb. 22, will (among other things) prohibit raising the interest rates during the first year a credit card account is opened, ban interest rate hikes on existing balances and require promotional rates to last at least six months.
“The new law bans the worst unfair practices the banks had been perpetrating on consumers,” says Ed Mierzwinski, director of consumer programs at U.S. PIRG.
Congress gave the industry nine months to prepare for the changeover. Many banks, as expected, used this time to put the squeeze on their current customers and boost income from new cardholders.
The American Bankers Association told Congress there would be negative consequences if it banned practices considered “unfair or deceptive” by many lawmakers.
In a memo to the U.S. House of Representatives, ABA executive vice president Floyd Stoner predicted “a significantly negative impact on both the price and the availability of credit.” [Translation: Interest rates on credit cards would go up and fewer people would be able to get a card.]
And for months now, that’s exactly what’s happened. Credit card companies have hiked interest rates, lowered credit lines, added fees and closed accounts. Even good customers, who pay their bills on time, are being penalized.
- Chase begins charging a $10 monthly fee to 400,000 customers who have large balances but little account activity.
- Bank of America announces it will charge cardholders who pay in full each month an annual fee of $29 - 99 a year.
- Citigroup starts charging annual fees to cardholders who don’t charge more than a specific amount (typically $2,400 a year) on their cards.
What are banks really doing?
In early October, another ABA executive, Kenneth Clayton, told Congress credit card issuers were undertaking a massive overhaul of their business practices. In his prepared testimony, Clayton said banks – big and small –were “working vigorously” to implement the protections of the CARD Act as soon as possible.
But that’s not how consumer advocates see it.
“We found there’s been very slow adoption of the new safeguards that the law will require,” says Nick Bourke, manager of the Safe Credit Cards Project at the Pew Charitable Trusts.
This summer, Pew researchers looked at nearly 400 credit cards, including all cards offered online by the country’s twelve largest bank issuers. These banks control more than 90 percent of the outstanding credit card debt in the U.S.
“There definitely has been some kind of rush to change the terms before the law takes effect,” Bourke tells me. “Banks have little inclination to change their policies until they are required to.”
Nessa Feddis, senior counsel for the American Bankers Association, calls some of the Pew study’s conclusions “misleading.” And yet, she says it “validates” what bankers had predicted.
“We were on every major news program saying the new law would mean interest rates would go up across the board for everyone and that it would be more difficult for consumers and small businesses to get credit cards. We also said those who managed their cards well would end up paying for those who do not.”
Rep. Carolyn Maloney (D-NY), who wrote the House bill, is confident the new rules will benefit consumers.
“It’s the beginning of the end of the Wild West for credit card companies. After this weekend they’ll no longer be able to send notices that raise rates on purchases consumers have already made. And come February 22nd, most of the worst tricks and traps they use will outlawed as well.
“But as one who writes the laws, let me tell you: a law isn’t enough. If we want to bring a complete end to the Wild West, we need a new sheriff, too. And that’s why we need a Consumer Finance Protection Agency — which the House has voted to create, and the Senate now needs to pass. A CFPA will protect consumers and enforce the law as companies try to wiggle around it,” Maloney said.
How to protect yourself
In about six weeks, many of the most egregious credit card practices will be prohibited. But as we’ve seen, credit card companies have already found legal loopholes that let them drive up the cost of having a credit card.
Bill Hardekopf, CEO of the Website lowcards.com says the banks will continue to find ways to increase their revenue.
“They’ll be legal, but they will definitely be a blow to consumers,” he says.
In 2010, expect to see:
- More cards with annual fees.
- Greater use of “inactivity fees” if you don’t charge enough.
- More cards with variable rates that can go up without advance notice.
- Lower credit limits.
- Cutbacks to reward programs;Closing of non-profitable accounts.
The best thing you can do to stay on top of these changes is to read everything that comes from your bank and with your monthly credit card statement.
“A lot of times mail from your credit card company doesn’t look all that important, but inside is a big change in your terms” warns Ginna Green with the Center for Responsible Lending. “Open your mail; read the fine print and if you don’t understand it, call them.”
Remember, you don’t have to keep a card that doesn’t work for you.
“You’re not locked into that card for a lifetime,” Hardekopf says. “If you are unhappy with the partnership you have with your credit card issuer, you have every right to shop around for a new card.”
Finding a new card won’t be as easy as in the past, but the U.S. credit card market is still very competitive, with more than 1,000 different cards available.