If you don’t already hate your credit card company, see how you feel in 20 minutes. Did you finally think you’d caught a break when the government tightened laws to protect consumers? Well, the credit card companies were way ahead of everyone, innovating their way around the Credit Card Accountability, Responsibility, and Disclosure Act of 2009. They created—no kidding—a credit card with an interest rate of 79.9 percent. If you decided to spend less money each month, there was a card that charged you more interest for that privilege. If you didn’t agree to pay a higher interest rate, one company doubled your minimum payment—overnight, with no warning. And one card featured a vanishing credit limit—from $30,000 to $15,000, and then (after you called to complain) $8,000.
In advance of new regulations meant to protect us (many of the provisions took effect February 22), issuers raised rates, jacked up minimum payments, lowered credit limits, and tacked on even more crazy fees to protect their bottom line. Seemingly no one has been spared:The retired Navy officer in Belfair, Washington, with an excellent credit rating and a six-figure money market account? Capital One raised his rate from 6.9 percent to 15.9 percent and gave no reason. A spokeswoman for the bank said, “Account changes like this are necessary in order for us to appropriately account for risk and continue to lend in the current environment.”
The craniosacral therapist in Richardson, Texas, who charged $45,000 to finance her education and who had a good payment record? Chase raised her minimum payment from 2 percent of her balance to 5 percent and started taking the extra $433 out of her bank account automatically. A Chase spokeswoman said that last August, fewer than 1 percent of its customers—typically those who “have not made as much progress” on their balance—saw their monthly minimum payments increase from 2 percent to 5 percent.
The freelance editor in Tallahassee, Florida, who always pays her balance in full? She got slapped with a $45 annual fee on her Bank of America card. (“They couldn’t soak me with interest payments, so they thought they’d take it out on the front end,” says Lisa Finkelstein.) A bank spokeswoman says, “We are testing an annual fee on a very, very limited number of accounts.”
In a recent study by comScore, a marketing research firm, 53 percent of more than 2,000 respondents reported that a bank had raised their interest rate on a credit card in the last year, 26 percent reported reduced credit limits, and 21 percent complained about increased fees. Whatever their reasoning for the changes, banks seem intent on firing their customers, and it’s working. The comScore study reported that 27 percent of respondents simply stopped using a card after the terms were altered.
Now that the new consumer-friendly law has taken effect, we can all just get along, right? Sorry to say, the cat-and-mouse game between consumers and credit card issuers is hardly over. Many of these tricks are still legal and thriving under the new law, along with many more loopholes that banks are eager to test. Here are answers to the most pressing questions about the new regulations—and tips for avoiding traps.
Q: Under the new rules, banks can’t mess with my interest rate, right?
A: Maybe. The law prevents issuers from raising rates on existing balances in most situations. That’s one of the biggest changes, eliminating a trap that has sent millions of families into debt spirals.
The Catch: After 12 months, banks can raise rates as high as they want on future purchases as long as they give 45 days’ notice. Consumers started getting a taste of these higher rates in late 2009. A 26-year-old job recruiter in Los Angeles had her American Express card rate bumped from 9.24 percent to 12.24 percent (even though she had never made a late payment). When she called Amex, “they said they were doing it to everybody,” she reports. A spokeswoman for the company says that last August, “in response to the business and economic environment, we found it necessary to increase some rates and fees on products.”
The Tip: “Watch your interest rates closely,” says Josh Frank, a senior researcher at the Center for Responsible Lending (CRL). As tedious and spirit sapping as it sounds, open and read everything that comes from your credit card company. “Some companies are sending out bills in plain envelopes,” says Lewis Mandell, a professor of finance and business economics at the University of Washington. Don’t mistake it for junk mail and throw it out. Remember: After 45 days, the new rate takes effect unless you have notified the bank that you choose not to accept it.
Q: So I have the right to refuse the new rate?
A: Sort of. The law says you can refuse to accept any new interest rate within the 45-day notification period, but you must stop using the card. You’ll have to pay off your existing balance over five years, at the old rate. Or pay double the minimum payment until the account is paid off.
The Catch: “Some issuers are not actually closing the account if you opt out,” says Josh Frank. “So if you accidentally use that card, it would constitute acceptance and trigger a rate increase.”
The Tip: Demand in writing that the account be closed. Until then, don’t use the card. Make sure you turn off automated payments on the card (check your online bank account).
Q: I’ll always have 45 days’ notice on the new rate, right?
A: It depends. A variable rate card—like a variable rate mortgage—is one whose rate is tied to an index beyond the control of the card issuer, usually the prime rate. That means the rate can rise or fall with the prime every month—including the interest applied to existing balances—and banks are not required to notify you.
The Catch: You won’t be getting credit at the prime rate. Lauren Bowne, a staff attorney at Consumers Union, says, “The margins we’ve seen are astronomical,” referring to the amount the bank tacks on to the prime to arrive at your rate. “Citi-bank set a rate of 26.74 over prime for some accounts, for a total of 29.99. This is not a bargain.” If a bank adjusts your margin, it has to give you 45 days’ notice. A Citibank spokesman says, “Customers can opt out and pay off an existing balance over time at their current rate.”
When the prime rate, now just 3.25 percent, goes up, things will get really ugly. For example, if the prime rate doubles to 6.5 percent (where it was two years ago), your interest rate on that Citibank card would be 33.24 percent. Ouch! It’s not surprising that virtually all bank credit cards are switching to variable rates.
The Tip: Avoiding this loophole will be next to impossible. But you can still shop around for the best variable rate at comparison sites like credit.com, lowcards.com, creditcards.com, and billshrink.com. Pay attention to the margin over prime that the issuer is tacking on to the card.
Q: So I’ll have to track the prime and see where my card rate is headed?
A: Good luck. Instead of tying your interest rate to something concrete and current—like, say, the prime rate on the closing date of the billing cycle—a bank could peg your interest to the average prime rate over the last 90 days. This new practice, dubbed “pick a rate” (the bank does the picking), allows banks to rake in big profits.
The Catch: The prime rate can change dramatically. (It soared to 21.5 percent in 1980.) A stable prime, however, means many consumers probably won’t notice the change. (Banks are, however, required to notify consumers if they switch to a pick-a-rate structure.)
The Tip: Read the fine print. It may be in the Schumer box—the plain English disclosure that comes with your credit card offer—or it may be enclosed in your statement. You want your rate to be based on the prime within a few days of the latest billing cycle. If it’s not, you’re about to fall into a pick-a-rate trap.
Q: It seems like my credit card bill is coming earlier than ever. What’s up with that?
A: The new law increases the grace period from 14 to 21 days. That means your bill will come earlier, giving you more time to pay it. To avoid confusion, the law also requires issuers to make bills due on the same due date every month.
The Catch: With all that extra time, says Bill Hardekopf, CEO of LowCards.com, “you stand a greater risk of leaving that bill in the pile. There could actually be more late fees as a result of this change.”
The Tip: Set up automatic bill pay so you don’t miss a payment.
Q: You said banks can’t raise the rate on my existing balance “in most situations.” What does that mean?
A: There are exceptions. The biggest one is if you are more than 60 days past due. But the new penalty rate must be removed after six months, assuming you have made on-time payments during that period. In addition, banks are still allowed to advertise teaser “promotional rates” to lure new customers, and those rates can be raised after six months.
The Catch: Several, actually. For starters, there is still what’s known as a hair-trigger provision in the system—that is, a payment that arrives after 60 days will trigger the new rate. Second, to qualify for the rate reduction after six months, you need to make every payment on time. If you’re so much as one day late on any payment, the bank has the right to impose the new interest rate permanently. Currently, there is no limit on how high the penalty rate can go.
The Tip: “Don’t be 60 days late,” says Chi Chi Wu, an attorney with the National Consumer Law Center. If you do get socked with a penalty rate, move mountains to pay on time for the next six months. And to avoid getting trapped by bait-and-switch teaser rates, Bill Hardekopf advises consumers to call the bank and ask whether a rate is “introductory.”
Q: If I’m late paying some unrelated account, like my cell phone bill, that can’t be used to raise my rate, can it?
A: Yes and no. You’re talking about universal default. The new law prevents issuers from jacking up rates on previous purchases if you’re late on some other bill.
The Catch: “If a credit card company wants to use your credit history to raise your interest rate going forward, it can,” says Travis Plunkett, legislative director of the Consumer Federation of America.the tip: Some rules never change: Pay all your bills on time.
Q: What about all those fees?
A: Expect to pay more. Fees account for 39 percent of card issuers’ revenue, so they aren’t going away. The new law barely addresses fees, except to say you can’t be charged a fee for going over your credit limit (unless you “opt in” to such fees) or a processing fee for paying your bill (unless you ask a rep to expedite your payment). And penalty fees, such as those ubiquitous $39 charges for late payments, must be “reasonable and proportional” to the violation, although as of January, the Fed hadn’t spelled out what that means.
The Catch: Most fees are still the Wild West of credit cards. “The law doesn’t regulate transaction surcharges like cash-advance fees,” says Nick Bourke, manager of the Safe Credit Cards Project at the Pew Charitable Trusts. “Those are going up significantly.” His latest Pew report cites Bank of America, which moved from a 3 percent cash-advance fee on 99 percent of its cards in December 2008 to a 5 percent fee on half its cards six months later. A bank spokeswoman denied the 5 percent fees, then (after being shown e-mailed images of the fee disclosures in bank documents) said they were tested for a limited time and are now down to 4 percent. When told the bank’s website still featured cards charging 5 percent, she said the site was “outdated.”
Other sneaky fees on the rise include annual “membership” fees (join the club!) ranging from $30 to $100, “inactivity” fees on open accounts that have not been used (literally a fee for nothing, as high as $36 a year), and similar monthly “service” fees. Some issuers are charging currency-exchange fees just for buying something online from a foreign company, even if it’s priced in dollars.
And in cases where fees are regulated, card issuers are finding even nastier tricks to empty your wallet. Perhaps the sneakiest fee dodge is from First Premier Bank, which issues so-called fee harvester cards that soak people whose credit is so bad, they can’t qualify for a regular card. Such cards typically start with a credit limit of $250 and annual fees totaling more than that—so the holder is in debt before buying anything. In an attempt to rein in such practices, the new law limits fees (not including penalty fees) to 25 percent of the available credit the first year. In response, First Premier jacked its interest rate up to 79.9 percent—a new record. “We go to great lengths to provide our customers with a full disclosure and a refund of fees if not satisfied,” said a bank spokeswoman.
The Tip: Shop around for cards with minimal fees. Since fees can change, pay attention to your monthly bill, whether it arrives in the mail or online. Do not agree to fees for going over your credit limit. To avoid embarrassment at the cash register, sign up for free online and text alerts when you’re approaching your limit.
By now, you might be wondering, What’s the point of passing new laws when the credit card industry just finds ever more creative ways around them? Many consumer advocates are asking the same question while praising the new law as a big step. “The credit card industry is always going to be one step ahead,” says Heather McGhee of Demos, a nonpartisan think tank. “We can’t keep going back to Congress every year and saying, ‘Uh-oh, they’ve invented this new trap.’?”
Lauren Bowne of Consumers Union says the best way individuals can guard against new tricks and traps is to avoid racking up credit card debt. “No matter what laws get passed,” she says, “consumers will still have to decide if it’s worth spending 20 percent more to buy that stereo. Maybe people will open fewer credit cards. That’s going to be a positive.”
Indeed, customers who aren’t deep in debt can find themselves squarely in the driver’s seat. When Citibank raised its rate from 12.99 to 29.99 percent, Jason and Lori Gradel of Huntington Beach, California, called to complain. While they waited for the bank to get back to them, they paid off their $4,800 balance from savings. “We had that bargaining chip,” says Jason. “We said, ‘Go ahead and close the account. We’re at zero balance.’?”
Citibank’s response? It rolled back the couple’s interest rate to 8.99—four points lower than the original rate. “For us,” says Jason, “it was such a comfort to be able to say, ‘We’re not bound to you guys.’?”