Before you get too excited about the new federal rules on nasty credit card practices going into effect Monday, consider this: there are still plenty of ways to get screwed. Nine months ago, President Obama signed the Credit CARD Act, which ended practices like “any time for any reason” increases on existing balances or late bill mailings, Sunday due dates, and other tricks that result in late payment penalties, for example, according to Americans for Fairness in Lending.
That’s great, but credit card companies have found all sorts of new ways to make up for the lost revenue (at least $12 billion a year, according to Morrison & Foerster as noted today in the Wall Street Journal).
“The CARD Act has some very significant benefits for credit cardholders. The restrictions on interest rate hikes and the ban on over-the-limit fees are tremendous. Consumers have cried out for these protections for years and they are finally about to take effect,” says Bill Hardekopf, CEO of LowCards.com. “However, there are a number of unintended consequences that have resulted from the CARD Act. These changes might affect more credit card consumers than the law helped.”
What are those unintended consequences? LowCards.com has the rundown:
- Since issuers will be unable to raise interest rates on new accounts for twelve months, they simply raised the advertised APR before February 22 so it affected everyone shopping for a new credit card account. According to the LowCards.com, the advertised Annual Percentage Rates for credit cards averaged 13.46% last week. Six months ago, the average was 12.11%. One year ago, the average was 11.51%.
- People under 21 will find it harder to build up their credit score. If they do not have a job with enough income, they must get an adult to co-sign. Many young adults will not take this extra step, losing out on the opportunity to build up a good credit history throughout college. Without a positive credit history, they may not receive as good an interest rate on their first house or car loan.
- Fees, fees and more fees. Issuers are introducing more cards with annual fees, increasing existing fees, and putting new fees on accounts. Last October, Bank of America notified a small percentage of their customers that it is adding an annual fee of $29 to $99 on their accounts beginning in February. Balance transfer fees, which have been at 3% for most issuers, have now been increased to 5% by Chase and Discover. Fifth Third Bancorp recently added a $19 inactivity fee if your card is unused for a twelve month period.
- The scarcity of fixed rate credit cards. Most issuers switched their fixed rate cards to variable rates, since the CARD Act allows APR increases in variable rate cards if the index used to on calculate that variable rate increases. As an example, if the index for a variable rate card is tied to the prime rate and the prime rate increases by 1%, the APR on that card can increase 1%. Many issuers switched their fixed rate cards to variable rate cards so they could maintain their margins once the CARD Act was instituted.
- Since any amount above the minimum monthly payment goes toward the balance with the highest APR, some issuers raised the minimum payment up to 5% on a number of accounts.
- A decrease in the amount of credit card rewards or cash rebates. Reduced rewards could come in several different forms: (1) a cutback in the payouts of cash back cards; (2) more miles or points needed for that free airline trip or hotel stay; or (3) higher tiers required for consumers to receive the same level of rewards.
- A decrease in the number of credit cards awarded by retail stores. Providing proof of income when applying for a credit card will make it significantly harder for consumers to instantly qualify for a credit card. This will certainly impact the marketing efforts of the 10-15% discount on a purchase if you sign up for a store’s credit card. Retailers rely on this marketing strategy to increase purchases and to build their mailing list of customers used for offering future coupons or early-bird discounts.