New Rules take Effect for Credit Cards; Traps to Avoid
If you haven’t heard, big changes are soon coming for the credit card business.
The CARD Act, which was signed into law last May, will finally go into effect Monday, meaning big changes for the millions of card-carrying Americans across the country.
Among other things, it will eliminate some of the more egregious practices of the past like so-called “double-cycle billing”, arbitrary rate increases and hefty fees for exceeding your credit limit.
But while the new law also promises consumers more transparency about their credit card bill, cardholders still need to watch out for a whole new series of traps and tricks.
Higher fees: For starters, consumers could suddenly find themselves socked with a variety of new fees and charges.
Banks and other card issuers have already been aggressively implementing new fees or raising existing ones to help make up for any potential revenue lost as a result of the CARD Act.
And whereas 3% was once the standard charge for rolling over a balance from one credit card to another, issuers like JPMorgan Chase (JPM, Fortune 500) are now assessing customers a 5% fee, according to Bill Hardekopf, CEO of the card rating site LowCards.com.
But with the new law setting no restrictions on the types of fees issuers can implement, consumers should pay particularly close attention to the “Terms and Conditions” section of their statement so they know exactly what they are being charged for, warn experts.
“Fees are the one source of revenue that will become more and more important,” said Hardekopf.
Tougher to get a card: As Congress moved closer to passing the law last spring, banking industry advocates cautioned that shaking up the status quo would mean that credit would be more difficult to come by for consumers.
So far, that seems to be playing out as predicted.
The amount of credit made available to consumers by credit card companies plunged by $252 billion, or 7%, between March and September of last year, according to IRA Bank Monitor.
Credit is poised to tighten even further. As part of the CARD Act, credit card companies will be severely restricted in how they market cards to college students, potentially shrinking an important part of their business.
But issuers are also expected to implement much more severe underwriting practices. Some may demand, for example, details on an applicant’s income or proof of other savings.
Consumers with poor or even a mediocre credit history, as a result, may find it much more difficult to get a card or have their credit limit extended after the new law takes effect on Feb. 22, said Joseph Ridout of the advocacy group Consumer Action.
“I think it is fair to assume that credit card companies are going to scrutinize their potential customers a lot more closely than they did in the past,” he said.
Fewer rewards: Consumers may also be increasingly unable to enjoy the fruits of their spending as a result of the new law.
It wasn’t that long ago where a cardholder could easily earn credit towards a free airline ticket or cash back for every dollar spent. But issuers are now quietly becoming more stingy with their rewards in an effort to save money.
American Express (AXP, Fortune 500), for example, recently told its co-branded card customers they would not be able to accrue reward points on their purchases if they were late with a payment. Only by paying a $29 fee could they recoup those points.
To avoid missing out, experts suggest that consumers carefully read any notices they get from their credit card company about changes to their loyalty or rewards program.
“Rewards can be another way of penalizing people too,” notes Nick Bourke, manager of the Pew Safe Credit Cards Project.
Rising rates: One of the biggest victories for consumers in the new law are a series of limits on how and when credit card companies can set interest rates.
Whereas in the past, banks could raise your annual percentage rate just for missing a payment on your cell phone bill or without giving a consumer much advance notice, such practices will soon be outlawed. Issuers now have to alert you at least 45 days in advance before raising your rate under the CARD Act.
The new law won’t shield consumers from rate hikes altogether, though.
In recent months, banks have moved consumers over to so-called variable rate cards, whose rates fluctuate based on the direction of the prime rate. And with that rate at historic lows, experts said consumers should be prepared for at least a moderate increase in their APR at some point.
The new law also does not include any sort of interest rate cap banks and issuers can charge customers that are late on their payment by two months or more.
Credit card companies may remain reluctant to impose any usurious rates ahead of a review of penalty rates and fees by the Federal Reserve scheduled for later this year and given the public discontent for banks these days.
But that doesn’t mean the days of big rate hikes are gone for good, Bourke said — especially for consumers who are overwhelmed by debt. So experts suggest consumers should take extra care to stay current on their bills.
“The [CARD] Act doesn’t absolve anyone from having to pay back their bills or take people out of harm’s way if they run into trouble,” said Bourke.