Despite New Rules, Credit Card Users Cautioned to Be Wary

Credit card issuers must follow new rules of the road as of Monday, but consumers should not view the new protections as a cure-all for their frustrations with plastic.

Instead, they should be ever more vigilant as credit issuers roll out new card agreements. They could result in new financial pain if card users aren’t careful.

For instance, some credit card issuers have said they will aggressively market over-limit protection as an invaluable feature of credit card accounts, said Josh Frank of the Center for Responsible Lending. The new rules, spelled out in the Credit Card Accountability, Responsibility and Disclosure Act signed by President Obama in May, forbid issuers from charging over-limit fees unless consumers opt into protection programs.

However, those new programs will likely carry fees that make the already dubious practice of exceeding your credit limit even less attractive.

“It’s the most expensive credit you can get on your card,” Frank told CRM Buyer.

New Provisions

Here’s a look at some of the most important rule changes:

• Card issuers can no longer raise interest rates on the existing balances of consumers who pay their bills on time. It sounds helpful — and it is. Issuers raised rates on millions of Americans for no apparent fault of their own, Frank said, and large rate increases on large balances can quickly erode available credit and raise minimum payments.

  The new rules protect consumers who make at least minimum payments on time, or even up to 60 days late. However, the rules contain also contain significant loopholes that could harm consumers if they’re not careful, said CPA Susan Howe, a member of the AICPA’s National CPA Financial Literacy Commission.

  Issuers can still significantly increase rates on new purchases, and consumers who are more than 60 days late can still be assessed penalty pricing.

  “Your best protection is to make sure you pay your bill on time,” Howe told CRM Buyer.

  Don’t believe the much-reviled universal default — where card issuers raise rates for payment problems on other accounts — is dead, Frank added. It is for existing balances, but issuers can still invoke the feature on new balances.

• Card issuers must now allocate payments above minimum payments to the highest interest-rate portion of a balance. Before, most issuers applied payments to the lowest rate first, meaning high-rate balances would stack up until the teaser-rate balances were paid. Now, anything over the minimum goes to the most costly credit first, helping bring down balances faster.
• There are new rules for over-limit fees. It used to be that a credit card company could let through charges that exceed your limit, then zap you with big fees for the privilege. Now, issuers have to get your permission first, which might be a bad idea.

  “If you have to go over your limit to buy it, you probably shouldn’t be buying it anyway,” said Howe. Issuers have been known to charge as much as US$240 for a $100 overage, she said, although a more typical amount is $35 per incident, according to Frank.

  That’s still extremely expensive credit, he said.

• Payment dates must be fixed. Statements must arrive at least 21 days before a bill is due, and due dates have to fall on the same date each month.
• Interest rates cannot increase for the first year on fixed-rate cards that are paid on time, except for introductory rates. Those must last at least six months.
• Account fees, such as annual fees or application fees, can’t exceed 25 percent of the initial limit.

New Tricks

Credit issuers have been busy changing card account agreements and rates in advance of the new laws, but it’s unclear how much is due to the new law and how much should be laid at the feet of the economy.

One issuer, for instance, is looking to get past restrictions on increasing interest rates on existing balances for consumers who pay late — but less than 60 days late — by giving consumers a rebate from a high interest rate each month they pay on time, Frank said.

For instance, the issuer sets a 29.9 percent “regular” rate, then rebates enough interest to make the actual rate fall to 12 percent or so on balances paid on time, he said. Consequently, the issuer isn’t raising rates for consumers who pay an hour or two late — they’re just charging the normal monthly rate.

While such practices might seem tricky or deceptive, said Frank, the overall effect of the rules — likely higher interest rates and fees — will work to create more honest pricing for credit cards, where so much of the profit for issuers has come on the back end, with high fees and penalties, rather than on artificially low interest rates.

Still, the real solution to the issue is a new regulatory agency to focus on consumer financing safeguards, he suggested. Such a proposal is already under discussion in Washington.