We consumers now have a few more credit protections than we did before, but to get the Act passed, Congress had to water down the wording somewhat.  It would not do to pass a law that would put many of Congress’s biggest campaign contributors out of business. So, there are still a few areas left for issuers to extract profits. 

Students

Before this law went into effect, students were sent credit cards that they ran up like free money while the parents got stuck with the bills, since they were under age.  Now, students under 21 years of age cannot qualify for a card without a co-signer.  How will the issuer know the applicant is a student?  They will likely only have income from summer employment.  The real qualifiers are the applicant’s age, and their income. 

Interest Rate Hikes

The new law does not protect consumers against interest rate increases.  It does protect them against increases on existing balances, but as long as the card issuer notifies the consumer at least 45 days in advance, interest on new purchases can jump considerably. 

This is supposed to give the consumer the option of jumping to another card for new purchases.  The consumer has three billing cycles to decline the new terms, close the account to future purchases, and pay off their balance at the old rate and payment schedule. 

Payment Allocation

If you have separate interest rates in force for old balances and new purchases, be aware that the CARD Act requires the card issuer to apply the minimum payment amount to the greater balance, which most likely has the lower interest rate. 

The CARD Act requires payments to be applied to the highest-rate debt on the account, so watch carefully that any payments exceeding the minimum payment are “accidentally” applied to the lower rate balance.    

Universal Default

Under the old shell game, issuers could raise a consumer’s interest rate if they were late on a totally unrelated account, like a utility bill.  This is now prohibited under the new law. 

But card issuer’s legal wizards have left some language in some offers that will activate a penalty APR.  Some of the reasons are exceeding credit lines, credit report information, and bounced or late payments.  Some catch-all language might be “market conditions”, or “at any time for any reason.” 

Read the small print. 

Penalty Rate

If a consumer is more than 60 days late on a payment, the card issuer can initiate a penalty rate, which averages nationwide slightly less than 30 percent.   That means for every thousand dollars that remains on your credit card by the end of the year, you will owe another $300 in interest, or nearly an additional one-third of your balance.  This is the way card issuers generate cash flow and keep consumers imprisoned in their cycle of debt. 

The new law provides a way back down the interest ladder.  It is meant to require the credit issuer to return the customer to their previous interest rate after six consecutive months of timely payments.  In reality, the law states that the card issuer is “supposed to” review and reduce a cardholder’s rate after six months of consecutive on-time payments. 

The law also states that this review must include market conditions (what others are charging) and the creditworthiness of the card holder.  This gives the card issuer an out if you caught up on the penalty account but your other accounts are still behind. 

Another method card issuers have been known to use is a technique known as “pigeonholing” where your payment arrives on time, and due to the card issuer’s workload, it is not posted until after the due date.  Remember one late payment will result in a lot more income for at least six months for the card issuer while you straighten things out. 

It is more important than ever to keep records of the exact dates payments are made.  Sending a check in the mail has no basis for verifying the date it was received, since the card issuer will discard the envelope with the postmark proof as quickly as possible, and the date on a check can be any date. 

Paying a bill by electronic banking will issue recordable dates of payment receipt.  Remember that many banks still issue a bank check that is mailed, and the process can take up to four days until the check is in the mail.  Be sure to add the four days plus a comfortable mail delivery time for your payment to be received.

The language of the new law is loosely worded.  Expect some creative moves when it comes to the card issuer backing off penalty rates.

Mail Notification

The highest court has judged that putting a notice in the U.S. Mail is proof of delivery, whether or not the addressee receives it. 

The new CARD Act requires payments to be accepted as timely when paid before 5pm EST on the due date or mailed at least 7 days before the due date. 

That concept seems to work fine for businesses that say they notified you, but doesn’t work that well for consumers mailing payments. 

Discontinued Cards

The 45-day rule will “probably” apply if the card issuer decides to discontinue your card.  The law is not clear about this circumstance, but issuers will most likely notify the consumer 45 days ahead to avoid running afoul of the law.  That’s good news for a consumer standing at a register with a big purchase.   

Added Fees

Credit card issuers have lost a bundle of expected revenue with this new law.  Estimates put the loss at around $12 billion per year.  It comes at a time when banks are already in bad shape because of the housing market, double the number of defaults from unemployed workers and others, and consumers cleaning up their balances. 

It is predictable that inventive fees not mentioned in the new law will surface.  There are countless fees that can be added to your bill, and interest rates can soar, if everyone in the credit market does the same and they notify you 45 days ahead. 

Although the prime rate for banks is low now, as it cycles upward, consumers can expect 45-day notices from their fixed-rate card issuer that they will be switched to a variable rate, tied to the prime rate.  Variable rates rise and fall with the economy and will not require the 45-day notice as the prime rate climbs. 

Be careful of ordering merchandise online.  If the merchandise comes from a foreign retailer or American territories, you can incur foreign transaction fees, even if the merchant allows you to pay in U.S. currency. 

Fee Avoidance

Be your own consumer advocate.  Consolidate your credit to one or two widely accepted cards with the lowest interest rate (beware of the balance transfer fee).  Join a credit union (lower interest rates).  Drop annual fee cards.  If you want to keep some cards, reduce your credit used to below 10 percent of your available credit to preserve your credit score.  For cards with inactivity fees, swipe them at a convenience store once a year (check the inactivity period).  If one of your issuers offers a rewards program, take the cash-back option. 

Pay your bills on time.  Read the fine print.  Read each piece of mail from your card issuers.  Stand up for your rights.  Play hardball.  Speak to supervisors.  Threaten to take your business elsewhere if they don’t retract an unjust fee, and do it if they don’t (I also like emails to the president or CEO,  factually detailing why you left).

The CARD Act was a big step in the right direction, but there will always be loopholes discovered by highly-paid legal eagles working against you.

The purpose of the CARD Act is to ensure that borrowers with a poor credit score and a history of late payments get treated as fairly as borrowers who have kept their credit record clean. 

Claims by credit card issuers that changes would lead to higher rates has been fulfilled.  Many issuers raised their interest rates and fees since the President signed the CARD Act on May 22, 2009.

In desperate attempts to take advantage of their customers before the new laws kicked in, credit issuers raised minimum payments and lowered credit limits for customers with bad credit, and closed accounts of customers who do not use their cards often and good payers who pay their entire balance each month.

The act does not limit how high interest rates can go and does not apply to business or corporate credit cards.

The Act was passed to beat several consumer-unfriendly practices, including:

• prohibiting credit issuers from arbitrarily changing the terms of their contract with a cardholder, the practice of “any-time, any-reason repricing.”
• requiring a customer option of a fixed credit limit, and preventing the credit issuer from charging over-the-limit fees.
• requiring 45 days notice before raising a customer’s interest rate.  The customer has three billing cycles to decline the new terms and pay off their balance at the old rate and payment schedule. 
• prohibiting rate increases on existing balances for fixed rate accounts or for universal default, which is a late payment on an unrelated account. 
• requiring the credit issuer to return customer to their previous interest rate after six consecutive months of timely payments.
• requiring a minimum of 21 days from the date the bill is sent out to the due date (increased from 14 days).
• requiring monthly due dates to be the same each month or next business day if a weekend or holiday. 
• requiring payments to be accepted as timely when paid before 5pm EST on the due date or mailed at least 7 days before the due date. 
• prohibiting the charging of additional fees for payment methods including online, mail, electronic transfer, or telephone.  The exception is an expedited payment to avoid a late fee. 
• requiring payments to be applied to the highest-rate debt on the account. 
• prohibiting the charging of interest for payments made during a grace period.
• requiring credit card statements to contain a schedule of time required and interest paid to pay off balance with minimum payments, and how much the payment must be to pay the balance off in three years. 
• requiring the customer agree to either a hard credit limit, or approval with an over-the-limit fee applied and limits the number of over-the-limit fees to three.
• requiring the up-front payment of all fees, before issuing of subprime cards, where fees will exceed 25 percent of the credit limit.

The CARD Act also prohibits issuance of credit cards to minors under the age of 21 without a co-signer unless they can prove they are able to repay.  This will stop the issuing of cards to minors where parents are responsible for their debts until age 21. 

Although the idea was to treat poor payers as fairly as good payers, the Act causes credit issuers to treat all borrowers the same.  Credit issuers say they have no way of knowing who will lose their job, get sick or other financial situation that will cause payment default, so they will treat everyone the same.  They believe the past does not guarantee the future.

Credit issuers are continuing their research into ways they can apply fees that are not covered in the CARD Act.  Fixed-rate cards could be switched to variable rates that give the issuer more flexibility.  Card issuers may increase transaction fees to retailers, causing them to stop accepting those cards or raise prices.

Congress is working on more transparency and oversight of the credit issuers, requiring reports on company profits, fees and rates that will be presented to Congress each year. 

Banks are now focusing on increasing profits from debit cards, since credit has now been limited.  The best course is to use cash when possible and ask for a discount equal to the Merchant fee.