Days after I addressed an All Consuming blog reader’s concern about a sudden spike in his credit card’s interest rate, Congress passed a landmark law to address the problem. But are consumers really safe?
President Obama signed the new Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 on Friday. The White House declared the event “a turning point for American consumers and ending the days of unfair rate hikes and hidden fees.” Here’s Obama’s fact sheet and here’s a video of the President’s comments.
Indeed, the bill should curtail some nasty practices. It bans rate increases on existing balances due to “any time, any reason” or “universal default” – a term that applies to card issuers raising your rates if you have a late payment to a different creditor.
Starting Aug. 20, there will be a 45-day notice requirement for rate increases and other significant changes in terms. Institutions will have to give you at least 21 days to pay your bill from the time it’s mailed. And say goodbye to late-fee traps like moving payment deadlines.
Most other provisions take effect in February 2010. Among them: Credit cards can’t be issued to people under the age of 21 unless they have an adult co-signer or show proof that they have the means to repay the debt. (This Consumers Union blog post pinpoints effective dates for the various protections.)
Unfortunately, that won't resolve problems such as the one Escandar wrote us about. After missing one payment, he saw his interest rate jump from 11 percent to 30 percent. Although he's been paying his bills on time, there's no guarantee his rate will drop. The reforms aren't retroactive. But starting in February, any payments consumers make above the minimum will be allocated to the highest-interest balance.
And what about people with good credit? David wrote our office last week to inquire about what the changes in the card industry would mean to him:
I find myself possibly caught between a rock and a hard spot. I use credit cards as necessity items for travel and for phone or online purchases, but always pay them off every month. Thus, I’ve found myself becoming what I’ve very recently heard in the news described as a “credit card deadbeat” for the reason of having cards that don’t have annual fees and because of not carrying a balance. For sure a true “Catch 22” is forming if you’re penalized for not submitting to being charged interest by carrying a balance, especially in an economic environment where credit card debt is a major issue for so many Americans. Even worse if fees would be introduced on cards that you signed up for that originally had no fees.
David has a point. Many industry analysts anticipate that credit card reform could lead to more annual fees, shorter interest-free grace periods, stingier rewards programs and the end of zero-percent APR promos. The bill doesn’t cap interest rates, so those could possibly rise.
The New York Times explains, “Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.”
The article quotes Edward L. Yingling, chief executive of the American Bankers Association: “Those that manage their credit well will in some degree subsidize those that have credit problems.”
A Washington Post finance columnist has an interesting take on the subject, questioning whether responsible consumers should really be entitled to a no-cost card. “You probably never considered that the credit pushers made your access to ‘free’ money possible by gouging the less fortunate with hideous penalty fees and wicked double-digit interest rates,” she says.
Whether or not you agree, it’s food for thought.
Do you think the new CARD ACT will help you or hurt you?