Research and Statistics

Credit CARD Act interest rate protections already in effect


With fewer than 45 days to go before major provisions of the new Credit CARD Act take effect, interest rate protections are already in effect for consumers.

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If you haven’t already received word from your credit card company about an increase in interest rates or fees on your existing account balances, consider yourself lucky. Credit CARD Act interest rate protections already in effect

That’s because the window has closed on the banks’ ability to raise interest rates at any time for any reason with little notice.

“Essentially, once you got past Jan. 8, the restrictions on ability to change major terms are already in effect now,” Kenneth J. Clayton, senior vice president and general counsel for card policy for the American Bankers Association trade group, acknowledged Wednesday during a press briefing. “The protections that are afforded on the 22nd [of February] already exist.”

Here’s why: A provision of the new Credit CARD Act of 2009 that took effect Aug. 20, 2009, requires credit card issuers to give consumers at least 45 days warning of interest rate hikes and other significant changes in terms. Since Aug. 20, banks could still arbitrarily increase interest rates for any reason as long as they gave customers the required notice. As of Feb. 22, when the second phase of the new law takes effect, issuers will no longer be able to jack up interest rates at any time for any reason on existing card balances. (See “Credit card law time line.”)

Unfortunately, as consumer groups point out, millions of credit cardholders have already gotten the bad news about jacked up interest rates and fees and being switched to variable rate accounts. In the months leading up to the landmark credit card reform laws, Bank of America, Discover, Citi and other card issuers have changed terms on accounts while they could still legally do so. The banks said they were adjusting terms to account for increased risk of credit card defaults in the down economy and because the Credit CARD Act makes it more difficult to increase rates after Feb. 22.

The national average credit card rate reflects the increases: Six months ago, the average card rate stood at 12.03 percent. On Wednesday, it hit 13.16 percent, the highest credit card average rate since 2007.

Rep. Carolyn Maloney declares victory over arbitrary credit card rate hikes
“The Wild West is over,” says Rep. Carolyn Maloney, flanked by ChuckBell of Consumers Union, Tracy Shelton of NYPIRG and New Yorkcredit cardholder Molly Gord.

Declaring victory
U.S. Rep. Carolyn Maloney, the New York Democrat who spearheaded the push for credit card reform in the House of Representatives, declared victory on Jan. 8 when she noted the passage of the cut off date in a Huffington Post blog. She held a press conference in New York City Jan. 10, telling consumers that if they have not received notices postmarked by Jan. 8, their existing card balances were protected from surprise interest rate hikes. She urged them to watch their mail in the coming days for notices.

“No longer will card issuers be permitted to raise rates almost at will on purchases you’ve already made — only on new charges going forward,” according to Maloney.

Going forward, credit card issuers who want to arbitrarily jack up interest rates can only do so for future card purchases and only after giving 45 day’s warning of the change. APRs cannot increase during the first year a card is issued. (See the Federal Reserve’s website for highlights of the new credit card law.)

According to the law, rates on existing credit card balances can only increase if:

  • The consumer is more than 60 days late paying a credit card bill.
  • A debt repayment (or workout) plan ends and the rate must be adjust to its previous level.
  • The account has a variable interest rate tied to the prime rate. (Note: The majority of U.S. credit card account are now variable rather than fixed rate accounts.)
  • An introductory or teaser interest rate has ended.
  • When military personnel end their service and a 6 percent cap on credit card interest rates for military is lifted.

Consumer groups are heralding the new era for credit cards.

“Consumers have waited long enough to get relief from excessive interest rate hikes and other abusive credit card practices that can trap them in debt,” Pamela Banks, policy counsel for Consumers Union, the nonprofit owner of Consumer Reports magazine, said in a statement. “These new protections will help stop credit card companies from arbitrarily jacking up interest rates and ripping off consumers with expensive fees and other unfair tactics.”

The marketplace is changing and people are demanding more simple products and people are getting it.

— Kenneth J. Clayton
American Bankers Association

Fees and other changes
The banking industry spokesman Clayton said consumers should expect a changing credit card landscape as the impact of the new law and restrictions becomes clearer. New fees have already begun to crop up, including a return to routine annual fees. “There will be other fees,” Clayton said. “Consumers will be given a heads up. If consumers push back and say we are not willing to accept those fees, there will be issuers who don’t charge those fees. The marketplace is changing and people are demanding more simple products and people are getting it.”

Among the new fees: A $1 processing fee for mailing required disclosure statements and monthly credit card statements.

“There is a cost of producing that and, of course, mailing it,” said Nessa Feddis, a bankers association legal counsel. “It’s not uncommon for people now to charge a fee for a paper statement.”

Other potential fallout from the new credit card law could be an end to those zero percent balance transfer offers. Instead, Clayton says, card issuers may begin to offer 10 percent balance transfer offers.

“On balance, you’re going to see benefits,” Clayton said. “Consumers are going to be very much more protected from surprises. You are likely to see higher initial rates because of the inability to manage risk on an individual account level.”

Watchdog still needed
Maloney and others point out that while the credit card reforms are a major victory, more needs to be done. A proposed Consumer Finance Protection Agency that would become a watchdog over credit cards and other financial products is still needed to provide ongoing oversight of the financial services industry. The U.S. House passed a Wall Street reform bill in December 2009 that would create such a consumer watchdog, but the U.S. Senate has yet to act on a draft of the bill circulated by Senate Banking Committee Chairman Christopher Dodd.

See related:A comprehensive guide to the Credit CARD Act of 2009, Creative new fees escape CARD Act rules, surprise consumers, Fed issues final Credit CARD Act rules

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