I recently came across two really big—no, make that gargantuan—CARD Act loopholes that no one has made much of a fuss about.
A few weeks ago, I was doing a little “light” reading on Helpwithmybank.gov, which is associated with the Comptroller of the Currency Administrator of National Banks (OCC), and read a Q&A that made me stop in my tracks. It was about what happens when you receive a notice that your credit card’s interest rate (also known as the APR) is going to increase in 45 days.
The question: Can I continue making purchases with my card at the existing rate for 45 days?
The response on Helpwithmybank.gov: “After 14 days, the new rate will apply to further transactions. At the end of the 45-day period, the bank can begin charging the new rate for any balances you accrued after the 14th day after the bank sent the notice.”
“Please note that if your rate is increasing because you were more than 60 days late in making a required payment, the bank can apply the new rate to all your balances.”
This response uncovers two astounding loopholes. Let’s take a look at each one.
Loophole #1: If you receive notice of an interest rate increase, your new rate is applied after 14 days—not the 45 days that’s implied under the CARD Act.
Honestly, my first response to this gem was: Are they kidding me? The common belief is that we all have 45 days before the increase takes effect. But according to this response by the OCC, if your interest rate increases, you don’t get 45 days before it takes effect.
Instead, credit card issuers can start applying the new, higher rate just 14 days after notification of the increase is mailed to you. This means that all purchases made after the 14th day are charged at the new APR. You get 45 days before you have to make a payment that includes the higher APR.
I contacted the OCC to make sure this response was accurate and in line with the Credit CARD Act 0f 2009. A spokesman for the OCC said, “After 14 days, the new rate will apply to further transactions.” He confirmed that the 14-day window is a correct interpretation of the CARD Act and that the 14-day period begins with the postmark date on the notification that’s sent to you. I know this is confusing, so here’s an example of a timeline to keep in mind if you receive a notification that your interest rate is going up:
August 1: Your credit card company mails a notification that your APR is increasing from 12 per cent to 15 per cent.
August 15: Any transactions you make from this day forward are subject to the 15 per cent rate.
September 15: At the 45-day point, your statement will reflect your new 15 per cent APR. And the 15 per cent rate applies to all purchases starting on August 15th.
So why the hoopla over the 45 days notice? Well, you can think of it this way. You can use your 45 days to figure out how you’ll pay a higher interest rate on your purchases. Or you can decide that you don’t accept the new terms and work out a plan to pay off your balance.
Loophole #2: If you’re more than 60 days late with a payment, you can get hit with a retroactive interest rate increase.
You know, we all thought the CARD Act had taken care of those nasty retroactive rate increases. But the Credit CARD Act identifies a few exceptions and being more than 60 days late is one of them.
So if you receive notice that your rate is increasing because your payment is more than 60 days late, your new rate, which might be the penalty rate, is applied to the outstanding balance. The outstanding balance is defined as the balance 14 days after the notification is mailed. And the penalty rate takes effect 14 days after it’s postmarked.
If you’re more than 60 days late with a payment and you’re hit with the penalty rate, here’s a timeline to keep in mind:
August 1: Your credit card company mails a notification that your APR is increasing from 12 per cent to 29.9 per cent, the penalty interest rate.
August 15: Your entire outstanding balance on this day is subject to the 29.9 per cent rate. If your balance is $10,000 on this day, your new higher rate is applied to the entire $10,000, plus any purchases you make from this point forward.
September 15: This is the 45-day point, so you’ll start getting statements that reflect your new 29.9 per cent APR and it’s applied to your outstanding balance as of August 15th.
I contacted all six major credit card issuers and asked how they handle these two loopholes. Betty Riess, a spokeswoman for Bank of America, said, “If we do raise the rate, the customer will be notified at least 45 days in advance before the rate on new transactions takes effect. Also, we do not raise rates on existing consumer credit card balances even if the customer goes 60 days late and we have no plans to do so.”
Riess says that Bank of America is aware that they could do so under the CARD Act, but they choose not to. It should be noted that Bank of America has recently been criticised for notifying consumers that a 29.9 per cent penalty rate might be applied to accounts that are even a day late. So at least they won’t be applying such a high rate retroactively.
But Chase, Discover, Capital One, and American Express all replied that they are applying the rules the way they’re interpreted by the OCC. These four issuers begin applying the new, higher APR 14 days after the notice is mailed. If a consumer is more than 60 days late with a payment, the new, higher rate is applied retroactively to the outstanding balance. Citi didn’t respond to repeated requests for information about how they handle this situation.
Keep in mind that these practices are entirely legal and within the confines of the CARD Act. It just wasn’t publicized, so most consumers don’t know about it. The best thing to do to protect yourself, regardless of which bank maintains your credit card account, is to open your mail immediately and read it twice. Be aware of the timelines I’ve outlined here so you know when the higher rate is being applied.
Note to the Federal Reserve: Revise your WYNTK pages
I often recommend the Fed’s “What You Need to Know” pages to consumers who need an overview of the CARD Act rules. But I can no longer send consumers there because it doesn’t tell the whole story. Here’s what I mean:
Regarding the 45 days notice, what it says: Your credit card company must send you a notice 45 days before they can increase your interest rate.
What it should say: Your credit card company must send you a notice 45 days before an increase in your interest rate shows up on your statement. But note that the bank will begin charging the new interest rate on transactions that occur 14 days after the postmark date on the notification.
Regarding retroactive rate increases, what it says: Increased rates apply only to new charges. If your credit card company does raise your interest rate after the first year, the new rate will apply only to new charges you make. If you have a balance, your old interest rate will apply to that balance.
What it should say: When a notice of an increase in your interest rate is mailed to you, the increased rate will apply to new charges after 14 days. If you have a balance, your old interest rate will apply to that balance. However, if the rate increase is because you were more than 60 days late with a payment, the new rate will apply to your entire, outstanding balance 14 days after the notification is mailed.
Really, this is a big deal, especially when it comes to retroactive rate increases. Let’s say Bob has a $15,000 balance at a 12 per cent APR and becomes unemployed. Bob goes into a financial tailspin and is more than 60 days late with a payment to his credit card issuer. Bob gets hit with a 29.9 per cent penalty rate. So now, if Bob doesn’t put anything else on his card, he’s carrying a $15,000 balance at almost 30 per cent interest! That’s around $4,500 a year in interest expense. If I’m Bob, I want to know about my situation as soon as possible so I can make some decisions about how to get myself out of this mess.
I have to wonder why these important details were not widely shared. The obvious answer? Telling the public that they have 45 days notice on interest rate increases is an easier sell. Imagine if consumers had also been been told this: Oh, by the way, when you receive a notification that your interest rate is increasing, you actually get hit with the new rate 14 days after the postmark date. You just don’t have to write the check and cough up the extra money for 45 days. The public would’ve focused on the 14 days, which would’ve been better because consumers would have had all the facts. I’ve reached out to the Fed and asked why these details weren’t included in the WYNTK pages and I’ll update this story as soon as I hear from them.
Seriously, all those in charge of interpreting (and attempting to explain) credit card legislation need to stop acting like consumers don’t need all the details. Not only do consumers want the details, they want the whole truth. Every last bit of it.
Beverly Blair Harzog is Credit.com’s Credit Card Expert. Beverly focuses on credit card issues and provides insight about current news that affects the credit card industry and consumers. She’s a nationally recognised expert on credit card issues and is also the co-author of The Complete Idiot’s Guide to Person-to-Person Lending. Reach Beverly at [email protected].