Last weekend, the final changes to the credit card industry spurred by the Credit CARD Act of 2009 went into effect for all credit card accounts, including existing accounts. While the goal of the new legislation and resulting regulation is to protect consumers by clarifying the terms of using credit and by banning some unscrupulous practices like two-cycle billing and the incredible shrinking grace period, there are still lots of opportunities for credit card companies to overcharge, manipulate, and trap their customers.
Here are a few dangerous changes credit card issuers can make to a customer’s agreement while in compliance with the regulations.
1. Cards can charge high penalty fees. In normal circumstances, credit cards issuers must limit penalty fees, like those for late payments, to $25. If a credit card user incurs repeated fees — whether due to negligence or to the loss of a job — the credit card company is free to increase these penalty fees. In these cases, there is no limit to the types of fees conjured up by the issuers. While each fee might have a limit, the next few years might see new fees.
2. Cards can increase interest rates. Many credit card companies already raised interest rates in advance of the new regulations taking effect. When asked, some issuers blamed the rate increases on the economy or changes in customers’ credit reports, but it’s pretty clear the main catalyst was the upcoming regulations and anticipation of earning less money from customers in the future.
While credit card issuers must give 45 days’ notice before increasing a customer’s interest rate on future purchases due to changes in their risk profiles, customers who violate their credit card agreements by paying late will be subject to an unregulated default rate.
In addition, although the new regulations stop credit card companies from increasing interest rates on existing balances, most credit cards have already circumvented that rule by changing “fixed” interest rates (which were never truly fixed anyway) to variable interest rates. Variable interest rates can change, even on existing balances. Furthermore, credit card issuers can increased “fixed” interest rates on existing balances if the customer hasn’t paid the bill for a certain amount of time.
3. Credit cards will reduce benefits. Benefits like cash back, concierge services, and points or miles accumulation will become less lucrative and less available for the consumer. We’ve already seen the disappearance of free 0% APR balance transfers, and 0% introductory interest rates for purchases are harder to find.
4. Annual and other fees have a high maximum. The new regulations require credit card companies to limit annual and other fees to 25 percent of the initial credit limit in total. This is an opportunity for issuers to raise annual fees. While a card with a $500 credit limit must be limited to a $125, a card with a $10,000 could carry an annual fee of $2,500! While a fee that high is not likely unless you have a very exclusive card, I expect more cards that have been free will start sporting annual fees and those that already carry fees will become more expensive.
The best result of the Credit CARD Act of 2009 is that it brought some of the credit card issuers’ tactics into public awareness. Unfortunately, some credit card users, particularly those who for whatever reason don’t play by the companies’ rules, don’t pay balances off every month, or don’t diligently make payments on time, will likely find that mistakes will be more costly than ever before.
Published or updated August 25, 2010.
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