Research and Statistics

What’s NOT covered by the credit card reform law


The sweeping credit card reform act’s regulations omit several types of cards and many practices consumer groups find objectionable.

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Despite a sweeping credit card law that adds protections for consumers this month, card issuers will still largely remain free to set the terms of your account in crucial areas such as interest rates and fees.

What's NOT covered by the credit card reform law
The Credit CARD Act of 2009, whose major provisions went into effect Feb. 22, 2010, prohibits many once-common industry practices, but leaves others.

Card issuers remain free to:

As a result, consumer groups figure that complaints about card issuers are likely to continue even after the bulk of the law takes effect Feb. 22.

“A huge step has been made to protect consumers from the worst tricks and traps,” says Lauren Bowne, staff attorney with Consumers Union. “It is a significant first step, but it doesn’t fix everything.”

The law — the Credit CARD Act of 2009 — regulates how card issuers handle specific issues in areas including billing, disclosure, youth marketing and introductory offers. But companies are still free to hike interest rates on future purchases, impose all kinds of fees and close accounts or lower credit limits without warning. The restrictions apply only to consumer cards, not business cards.

Consumer groups are pushing for more regulation to address those issues. They’d like the federal government to create a powerful pro-consumer regulator. The U.S. House in December passed a bill that calls for such an agency, and the Obama administration supports it, but its future is uncertain in the Senate. Banks and business groups oppose the legislation.

Nessa Feddis, vice president and senior counsel of the American Bankers Association, says further restricting the flexibility of card issuers will hurt consumers because banks will simply refuse to offer them cards.

“Government price controls don’t work, and they end up harming the people they’re intended to help,” she says.

Here’s a summary of the major areas left untouched by the new law:

Raising and adding fees
Although the new law restricts certain fees, such as those charged for surpassing credit limits or paying late, plenty of other charges remain fair game. Consumer groups say card fees are like playing Whac-a-Mole: As you squash some, others pop up.

In recent months, banks have ramped up additional fees. Last year, Fifth Third Bank began charging some cardholders $19 for not using their cards for 12 months. In December, Alliance Data Systems, which issues private label cards for retailers, said it would start charging customers $1 per month to receive statements by mail. Citi has begun to charge higher rates on some cardholders who don’t charge more than a certain amount.

Other banks are eyeing higher charges for annual fees, buying in foreign currencies, taking cash advances and requesting higher credit limits. Those are all permitted under the new law, though there are some new, mild restrictions on upfront fees charged during the first year of subprime accounts.

“Credit card issuers are mostly free to do whatever they want in terms of fees,” says Josh Frank, senior researcher with the Center for Responsible Lending.

Hiking interest rates
Although the new law heavily restricts rate hikes on existing balances, it does not prohibit card issuers from raising rates on future purchases. There’s no limit to how high annual percentage rates ( APRs) can go. However, after Feb. 22., banks must give 45 days notice of higher rates, and they’re restricted from raising rates on accounts less than a year old.

In October, a South Dakota subprime credit card marketer, First Premier Bank, raised eyebrows when it offered a card with an interest rate of 79.9 percent. Such a rate is not illegal and will not be under the new law.

“People need to watch out for the fact that there’s no cap there,” Bowne says.

Closing accounts, lowering limits

Banks remain free to close accounts or lower credit limits without notice and for any reason. As the economy has stalled, banks are reducing their exposure, and nothing in the new law prohibits them from doing so.

Domenick Mirando, who helps run his father’s towing and auto repair business in Milldale, Conn., was frustrated to learn there’s little he can do about the issuers of his four cards chopping his available credit by about $25,000 over the past three months — money he needs for the business. After calling the offices of his attorney general and his senator, he’s now consulting with bankruptcy lawyers.

“I don’t know what anybody can do,” says Mirando, 58, who adds that he never paid late. “It’s not that it’s illegal. It may be immoral, though.”

Aside from being an inconvenience, the practice can also lower consumers’ credit scores, which are based in part on the ratio of debt to available credit. In February 2010, a national survey showed 48 percent of all cardholders reported their issuer had made a unilateral change in the past 12 months. The most-common change: 38 percent said they’d seen an interest rate increase. Another 14 percent said their credit limits were cut. A drop in consumers’ credit limits can drop credit scores, which could hinder other kinds of borrowing.

Exempting business cards

The provisions of the law apply only to consumer credit cards — not business credit cards or charge cards. Small businesses, which have increasingly turned to credit cards as a source of financing in the economic downturn because bank loans have dried up, do not receive the law’s protection if they have business or corporate accounts.

A survey released in January 2010 by the National Small Business Association showed that 68 percent of responding members said that rates and terms on credit cards had worsened in the past five years. One-quarter said they pay 20 percent interest or more on their cards.

However, the law requires the Federal Reserve to study small businesses’ use of credit cards and how those companies are protected from unfair practices — an indication that Congress might consider extending some provisions to business credit cards in the future. That report is due May 22, 2010.

See related:1 in 10 give up credit cards — or have them taken away, Issuer defends credit card with 79.9 percent rate


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