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Credit-Card Issuers Find Creative Ways to Skirt New Law
The new law was designed to defeat several bad practices. For example, starting in February, due dates for monthly payments must be the same each month. Any payment amount beyond the minimum must be applied to the highest-rate debt on the account. Rate hikes on existing balances on fixed-rate cards are prohibited under most conditions. Card issuers can't charge additional fees when consumers pay by mail, electronic transfer, online or phone unless the customer requests an expedited payment to avoid a late fee. Other practices, like "double-cycle billing" -- where the issuer adds finance charges for previous billing cycles to an account that was paid off because there was an average daily balance until the debt was paid -- are off the menu too.
It's all good, but be wary of what's coming next
Out With the Bad, in With the Worse
Not surprisingly, lenders are using fees as a main weapon. About 80% of all credit cards carry no annual fee, but many issuers are starting to put fees in place. Even if they don't charge an annual fee, issuers are adding "inactivity fees" for consumers who don't use the card to make purchases or those who don't make a certain amount of purchases in a 12-month period. Lenders are also hiking balance-transfer fees, and removing caps and limits that might otherwise make transfer offers more consumer-friendly. Issuers also are raising minimum finance charges, so that if your balance is so much as a penny, the lender is guaranteed a charge of, say, five bucks.
Also, they've instituted what industry watchers describe as "pick-a-rate" pricing on variable-rate cards that are tied to an index. Rather than linking to, say, the prime rate and altering what you pay whenever the prime rises or falls, some lenders tie a variable-rate card to "the highest prime rate within a 90-day period." Thus, when rates go down, your variable rate lags behind the move, but when rates go up, you get tagged right away.
A recent study by the Center for Responsible Lending says this one change in how rates are calculated can result in annual percentage rates that are 0.3% higher than
traditional pricing. Further, they estimate that it is already costing consumers $720 million annually.
With the new rules basically encouraging card issuers to move toward variable-rate offers -- because they must give 45 days' notice before raising any fixed rates -- you can expect this kind of rate-fixing to become much more standard practice; if that happens, according to the Center for Responsible Lending, the cost to consumers could more than triple.
How About an 80% Interest Rate?
Similarly, card issuers are putting a floor rate on their variable-rate cards, which typically means the current rate has little or no room to drop now or in the future, but has infinite opportunity to rise.
Then there are the truly egregious efforts to make money in a post-CARD-Act world. First Premier Bank, a sub-prime card issuer, introduced a card with a rate of 79.9%. That's not a typo.
The new law caps fees for sub-prime cards at 25% of the available credit line. First Premier had been offering a card with a minimum of $256 in fees, on a credit line of $250. Obviously, that kind of deal -- aimed at someone who has a horrible credit history, but who needs a card, most likely in an attempt to rebuild their credit -- gets killed when the CARD Act becomes law. One possible replacement is a card charging $75 in fees on a $300 limit, but with that 80% annual percentage rate on purchases.
Some card issuers even are re-engineering double-cycle billing, where they charge you the interest upfront and rebate the interest if you pay the bill in full. Fail to pay off your balance each month, and the upfront charge increases your costs to where they are the same as with the soon-to-be-illegal double-cycle system.
Experts suggest consumers need to watch their cards and any changes in terms carefully, because the items that will inspire the next twist on the CARD Act are happening now, as the law takes away the old, standard methods for fleecing consumers.
"The difference between now and a year or two ago was that you could take your business elsewhere if you didn't like what they were doing," said Gerri Detweiler, personal financial adviser for Credit.com.
"Now, given the economy and how card issuers are tightening up, it's increasingly hard to do that unless you have really good credit and don't need the card," she said. "If you need a card and don't have a great credit score, you may just have to live with whatever the card issuers come up with next."