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New credit card laws rife with loopholes

Even with the new credit card law, which took effect on Monday, there are still many ways you could end up paying more than you should for your charge cards.

You've heard a lot about the Credit Card Accountability Responsibility and Disclosure Act of 2009, which took effect on Monday. requires credit card companies to treat their customers more fairly, and that's clearly a victory for consumers. But even with the new law, there are still many ways you could end up paying more than you should for your charge cards.

Joshua Frank with the in Boston points out that bankers have already found ways to get around it. “The new law is not going to protect you from every trick and trap,” he warns.

For instance, the law does not cap interest rates or prevent card companies from closing accounts at will. They can still lower credit limits or raise minimum monthly payments with virtually no notice. And it does not limit issuers from imposing new fees or boosting current ones, such as cash advance and account transfer fees.

“For every fee that might disappear or get lowered there’s another fee lurking around the corner,” warns Adam Levin, chairman of , a Web site that focuses on consumer credit.

Some banks now charge an inactivity fee, as high as $36 a year, if you don’t use the card. Some charge for a paper statement. Some have a minimum finance charge, meaning you could owe a couple of cents but be billed a couple of dollars.

Annual fees are being added to cards, and existing fees are going up. Foreign transaction fees are being increased and expanded. You could be charged as much as 4 percent for a purchase made in another country.

The new law will prohibit most retroactive interest rate hikes. In the past, when card companies raised your rate, it applied to your current balance — purchases already made at a lower rate — as well as future transactions. The new law outlaws this outrageous practice unless you fall behind in your payments more than 60 days.

The bank can still raise your interest rate on future purchases, but only after 45 days advance notice. (This is not required if you have a variable-rate card or are more than 60 days late making your minimum payment). This gives you time to figure out what to do. You accept the change or say no, close the account and look for another card.

Under the new law credit card issuers cannot raise the interest rate on new accounts for 12 months (in most cases). “So they simply raised the advertised APR before Feb. 22 so it affected everyone shopping for a new credit card account,” said Bill Hardekopf of .

Six months ago, the average credit card interest rate reported by was 12.11 percent. Last week, it averaged 13.46 percent.

‘Hidden and deceptive’ strategies
CARD does not limit variable interest rate increases. That’s why so many accounts have been switched from fixed to variable in the last few months.

by the Center for Responsible Lending blasts the banking industry for using practices “designed to take advantage” of customers and “exploit areas” not covered by the law.

For example, some banks now have a new way to calculate the market-based index rate on variable-rate cards. Traditionally, the index has been based on “the maximum prime rate reported on the last day of the billing cycle.”  The report says many issuers have changed that language to “the maximum prime rate reported in the 90 days preceding the last day of the billing cycle.”

That simple change, which most of us would probably never notice in the fine print of our contracts, can greatly boost a bank’s profits. The Center for Responsible Lending estimates it will raise the average customers’ annual interest rate by 0.3 percent. The report says 117 million card accounts now use this language. The total cost to those cardholders is estimated at $720 million per year, an amount that could rise to $2.5 billion if it becomes the industry standard, according to the report.

The report also criticizes lenders for using a “manipulated fee structure” to look like they’ve lowered late fees when they now charge almost everyone (87 percent of card holders) the highest penalty fee possible.

Study author Joshua Frank says the card companies are “gaming the way late fees are designed.”

What’s the trick? The vast majority of credit cards have a three-tiered penalty structure based on the balance. Three years ago, the highest tier was $1,000 or more. Now it’s typically $250 or more, so almost everyone who pays late gets hit with the largest fee.

To avoid these penalties, make sure you get your payments in on time, every time.

Protect yourself from new traps
It is more important than ever that you look at your credit card statement each month and any other notices you get from your credit card company. CARD requires bigger and better notice of changes to your account. But that doesn’t mean a thing if you ignore that information.

“You need to read everything you get from your bank or credit card company and then decide what you want to do about it,” advises’s Adam Levin. “It doesn’t matter how much law or regulation there is, or how vigorous the enforcement. No one has a bigger stake in your financial future than you do.”

If you don’t like the way you’re being treated by a credit card company, vote with your wallet. Close the account and find another card. If you have a really strong credit score (say a FICO above 740) the negative impact to your credit score will be minor and temporary. Don’t do this if you plan to apply for some other form of credit (mortgage, car loan or home equity line of credit) in the next six months.

“While it will not be easy to change to a new credit card unless you have stellar credit, it can be done, and now you’ll have time to do it,” says Ruth Susswein with the group .

Make sure you look at various options. Use sites such as , and to shop for cards. Be sure to check with the credit unions and smaller regional banks in your area. You may be pleasantly surprised to find better rates and lower fees.

My two cents
On its Web site, the says these new rules will “help empower consumers to take control of their personal finances” and eliminate “many practices that frustrated credit card customers.” ABA senior vice president Kenneth Clayton calls this the start of a new era, “where customers will have greater choice, control and predictability in managing their credit card accounts.”

The CARD Act – which the bankers worked tirelessly to kill – does change the rules of the game. But it can’t cover all the bases. Banks have used the time leading up to this week to boost fees, jack up minimum payments, slash credit lines and close accounts. They want to make money off their credit card customers, I understand that, and they continue to finds all sorts of creative and sometimes sneaky ways to do that. Credit card issuers have just begun to work around the new law. So stay on your toes!