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Credit card reform law quirk: 45 days' notice becomes 14

You have more time to ponder new terms; just don't try to use the card

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Have you received word from your credit card issuer that your interest rate is going up and you have 45 days to opt out of the higher rate? Thinking about spending all you can under the older, lower rate before the new APR kicks in?

Not so fast. The Credit CARD Act of 2009 has a clause that might make you pause before buying high-end items at what you think is a lower interest rate. Even though you have 45 days to decide whether to accept an interest rate increase, you have at most 14 days before that higher rate applies to new purchases -- regardless of whether you eventually opt out of the increase.

The wide-ranging reform law's first provisions took effect Aug. 20. Among them: Credit card issuers must give consumers 45 days' warning of interest rate hikes, fee increases and other significant changes in terms. When they mail notices of these changes, they must inform card users of their right to opt out -- to close their accounts and pay off the balance at the existing, lower APR.

However, a little-noticed section of the law says the new, higher APR will apply to any purchases made more than 14 days after the notice of changes is mailed.

14 days, not 45
"If they use their card during this period, they could be subject to the new rate," says Dean DeBuck, spokesman for the Office of the Comptroller of the Currency (OCC), the federal agency that regulates national banks.

Wednesday, the OCC issued a bulletin to banks clarifying the 14-day rule and asking banks to include an additional disclosure in letters sent to customers who have changes in account terms that qualify for the 45-day advance notice. Under the new law, only certain changes in terms (such as interest rate hikes and fee increases) qualify for the 45-day notice. Increases in the minimum payment amounts, decreases in credit limits and closing accounts do not qualify.

The additional disclosure reads:

"NOTE: Even if you reject this change in terms, the new terms will be applied to any transactions on your account that occur on or after [INSERT DATE]."

The credit card law does not require banks to tell consumers about the 14-day rule in the notices. Until the Federal Reserve clarifies the rule, the OCC is asking banks to inform customers to "avoid unnecessary consumer confusion," according to the bulletin.

"If they use their card, they could get hit with the higher rates," DeBuck says. "If they don't, then there's no issue."

Intent: Stem sprees
Why have this 14-day rule? According to the Fed, allowing card issuers to begin charging the higher APR prevents card users from abusing the system by going on shopping sprees before the higher APRs take effect.

"If a person has received a 45-day notice, they cannot run out and start charging things in days 15-45, hoping to add those transactions to the protected balance," Linda Sherry, director of national priorities for Consumer Action, a nonprofit consumer advocacy group, wrote in an e-mail. "They are afraid people will try to game the system!"

It is going to cause confusion for sure.

-- Linda Sherry    
Consumer Action    

She added: "It is going to cause confusion for sure." The provision is similar to a clause in the bankruptcy law that limits cash advances and amounts spent on luxury items prior to filing for Chapter 7, Sherry says. 

The confusion in part stems from the newness and the scope of the credit card law, the most wide-ranging reform of the industry in decades. The law took effect less than a week ago and the practical implications of some of the provisions are just beginning to come to light -- something that happens with many local and federal laws. Wednesday's OCC notice is one example of how regulators are implementing it; the Federal Reserve Board is also reviewing the new law and drafting rules to clarify different aspects of the act.

Advice: Don't spree
The practical advice for consumers who get notice of an APR increase on a credit card is to stop using the card until they decide whether they are going to opt out of the changes. If they have recurring or automatic payments made with the card (such as utility payments or subscription services), contact the companies billing the credit card to remove the card as a payment method.

Adds Sherry: "Of course, if they did use the card, or if straggler charges came in, they can just pay that portion of the balance in full by the next due date."

Sherry indicated the 14-day rule is just one confusing aspect of the new right to opt out.

"My big question is, when is the opt-out supposed to be effective? Will consumers be given the full 45 days to 'opt out' or will they be given an earlier deadline? If they opt out, is the card really closed or are they just expected not to use it. (This is how Bank of America now does it.)

"In any case, consumers are going to have to be vigilant and this 'protection' seems fraught with issues."

DeBuck says the OCC issued the bulletin after realizing that consumers could be confused and not because consumers had complained about being assessed interest charges in error.

"It's something that we noticed on our own and just wanted to clarify," he said.

See related: Credit card reform and you, Comprehensive guide to the Credit CARD Act of 2009, First phase of credit card reform law kicks in

Published: August 26, 2009


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