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Consumers gain right to opt out of credit card rate increases

45-day notice of rate hikes also part of Credit CARD Act of 2009

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The first phase of the new Credit CARD Act of 2009 kicked in Aug. 20, lengthening notice requirements and giving consumers the right to opt out of rate increases.Credit card reform law's first phase goes in effect Aug. 20, 2009

Under the first phase of the new law, consumers must be given:

  • At least 45 days advance warning of changes to their credit card accounts. Currently, only 15 days' notice is required unless customers default on their accounts and interest rate hikes can take effect immediately.
  • At least 21 days to pay their monthly credit card statements without threat of late fee penalties.
  • The right to opt out of interest rate hikes and fee increases, and cancel their accounts while paying off the balances under the old, lower interest rates. Previously, issuers offered opt out options at their discretion.

Other aspects of the new credit card law -- such as restrictions on interest rate hikes, bans on issuing and marketing credit cards to young adults and gift card regulations -- take effect in February 2010 and later. (See Interactive time line for implementation.) In addition, starting July 1, 2010, a host of requirements for disclosing fees, rates and terms on monthly statements, credit card applications and mailers will become law as a result of new rules drafted and approved by the Federal Reserve Board and other banking regulators.

Taken as a whole, the Credit CARD Act and upcoming federal rules mark a dramatic shift in how credit cards will be marketed, issued and billed. Card issuers will have to "dismantle their existing models and then rebuild them -- just as a carmaker might have to completely redesign its models," Nessa Feddis, vice president and senior counsel for the American Bankers Association trade group, said Thursday during a press briefing on the new law and provisions that start Aug. 20.

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She acknowledged that credit card issuers have cut credit limits, closed accounts and increased interest rates in anticipation of the new laws. American Express, which before the law's effective date had not offered card users an option to opt out, hit consumers with rate increases just before they could legally opt out.

The reason for these and other card maneuvers: As the law phases in, card issuers once-free hands are increasingly tied. Making changes won't be so easy. As a result, card issuers "have to basically front load that risk and risk equals cost," Feddis said.

More costly credit
Other potential impacts of the new law: "Credit cards will be less available to consumers and to small businesses. Their limits will be lower and they will pay more," Feddis said. "This 45-day advance notice means you can't change the rate on somebody even though they've become more risky," she added, noting the exceptions included in the law, namely, when the account has a variable rate, if a promotional or teaser rate is used or when the cardholder completes a workout debt payment plan.

New opt-out rights explained

Starting Aug. 20, 2009 the Credit CARD Act requires credit card issuers to give consumers the right to cancel or opt out of certain changes in terms on their accounts.

  • Credit card issuers must inform card users of the right to cancel when they mail the 45-day advance notice of the change in terms. The notice must explain the steps cardholders can take to exercise their rights to cancel, including a toll-free number to call and the deadline for opting out.
  • Opting out means the consumer can no longer make purchases with the card. Instead, the old, lower interest rate or fee will be applied while the consumer repays the balance.
  • There are exceptions to the opt-out rule. Consumers cannot opt out of increases in minimum payment amounts.
  • Another major exception: Variable rate credit cards, whose rates are tied to an index -- almost always the prime rate. When the Federal Reserve raises interest rates, it raises the prime rate. Those increases are passed on to variable rate cardholders; no opt out allowed. In recent months, card issuers have reacted by switching consumers from fixed rate cards to variable rate cards.
  • Consumers who are more than 60 days late making payments do not have the right to reject APR increases.
  • Reductions in credit limits also cannot be rejected by cardholders. 
  • Issuers cannot demand payment in full of the outstanding balance or charge monthly maintenance fees on closed accounts if consumers reject the changes in terms.

Source: The Credit CARD Act of 2009

Many of the major credit card issuers contacted this week indicated they will meet the deadline; many already comply with advance notice requirements.

"Wells Fargo already follows many of the practices required by the new legislation -- including the 45 days' advance notice, 21 days to pay monthly bills and disclosure of the consumers' right to opt out of certain changes in terms," Lisa Westermann, assistant vice president for public relations at Wells Fargo, wrote in an e-mailed response.

"We began informing affected card members on their July billing statements that we are extending the time period for paying bills," according to AmEx spokeswoman Molly Faust. "They now have at least 25 days to pay their bill. In addition, we will inform card members at least 45 days in advance of a change in terms and will explain their right to opt out of that change as applicable."

"Citi will comply fully with the new credit card law, and we are committed to having all of the new rules in place by the deadlines," Citi spokesman Sam Wang, wrote in an e-mailed statement. Bank of America and Capital One representatives also indicated they were on track to comply with the law.

A struggle for smaller banks, credit unions
Smaller community banks and credit unions that have limited resources to make the technical billing changes and disclosures required by the law were less confident about their ability to make the Aug. 20 deadline.

"They are scrambling just like everybody is scrambling. It's not a lot of time to prepare," said Linda Echard, president and CEO of ICBA Bancard, an affiliate of Independent Community Bankers of America, a trade group of small community banks. According to Echard, the 600 credit card-issuing banks in her association are spending several million dollars reprinting and revising credit card brochures and applications to reflect the new disclosures.

"They never engaged in these 'change the terms every 45 seconds' that everybody else has done. Yet they now have to change all their collateral materials. They will bear all the burden even though they've always operated as honest brokers."

Credit unions, too, have complained about the unfair burden the requirement to provide 21 days to pay monthly credit card bills will have on credit unions. Since many credit unions send monthly statements that include all types of customer accounts -- not just credit cards -- credit unions are having difficulty complying with the law. More than 300 comments filed on the Fed's website about the first phase of the new law were from credit union representatives who said the Aug. 20 startup was unreasonable. The Consumer Federation of America and Sen. Christopher Dodd, chairman of the Senate Banking Committee, has asked the Fed to extend the deadline to give credit unions more time to revamp their operations. The head of the National Credit Union Administration, which regulates credit unions, sent a letter of Fed Chairman Ben Bernanke Aug. 6 indicating not all credit unions may be in compliance.

Getting rate hikes in under the wire
American Express was the only major credit card issuer that did not previously offer customers opt-out options when rates were hiked. Come Aug. 20, that will change. AmEx is slipping some interest rate hikes in just in time to beat the Aug. 20 startup of mandatory consumer opt-out rights. CreditCards.com was contacted by several readers complaining that they had received notices of AmEx rate hikes that take effect Oct. 1, 2009, but that did not offer a chance to opt out. The readers questioned whether this was legal given the Aug. 20 effective date of the Credit CARD Act.

According to the Fed, issuers that provide notices of interest rate hikes and other changes BEFORE Aug. 20 do not have to offer the right to opt out -- regardless of when the rate hikes actually take effect. Any notices provided AFTER Aug. 20 must include information about opting out.

AmEx spokeswoman Faust responded: "Like all companies, large and small, our pricing has to be responsive to the business and economic environment. As a result, we have found it necessary to increase rates and fees on some of our products."  

Citi, which had offered customers the option to opt out of interest rate hikes and continue using their credit cards, is revising its policy to reflect the new law, according to Citi spokesman Wang: "If we make any changes in terms to our customers' accounts, we will notify them and explain clearly how they can reject those changes if they wish."

See related: Credit card reform and you, How to cancel a credit card, How to safely, securely destroy a credit card: 6 tips, Credit card video: Cutting up your card the right way, A comprehensive guide to the Credit CARD Act of 2009, Fed issues final rules for first phase of Credit CARD Act, Will new credit card law help or hurt consumers, How to cope until the new credit card rules take effect, What the new credit card rules mean for you, Feds finalize sweeping new credit card rules, Interactive time line: How the bill became law, when its provisions take effectAnnual fees return in credit card mail offers, Law alters cozy relationship between colleges, credit card issuers, New credit card rules don't cover business, corporate credit cards

Updated: November 13, 2009


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