Story URL: http://news.medill.northwestern.edu/washington/news.aspx?id=139091
Story Retrieval Date: 5/25/2013 11:02:16 AM CST
· FEES THAT PUNISH THE GIFT CARD GIVER: Inactivity fees charged to the gift card buyer if the recipient allows gift to collect dust. Under the CARD act, these fees can only be charged if the gift buyer lets their gift sit unused for 12 months.
· OBSCURE LANGUAGE AND FINE PRINT: Credit card contracts are typically composed of these two elements. The CARD act will require contracts to be posted on the Internet in adequate font and plain language.
· LATE BILLING: When credit card companies bill customers near the due date, making it difficult to pay on time. Under the CARD act, companies will have to bill customers 21 days ahead of time.
· DOUBLE-CYCLE BILLING:When credit card companies not only charge interest on a late payment, but also on the timely payment made before the late payment.
· RETROACTIVE RATE INCREASES:"Any time, any reason" rate increases on existing balances – even ones that are not late.
· MANDATORY OVER-LIMIT FEES:Under the CARD act, consumers will have to be asked if they want to go past their credit limit and pay the over-limit fee before the chancy transaction is made.
WASHINGTON – In a sort of binge-before-Lent move, some credit card issuers are hiking up interest rates and fees before a key law takes effect early next year.
The Credit Card Accountability, Responsibility and Disclosure (CARD) Act was signed by President Barack Obama in May. The law intends to prevent, or at least curb, many of the revenue-raising tactics used by card companies that siphon profits from consumers.
Some of the targeted practices include penalties for late payments that also end up punishing previous timely payments; contracts that draw customers in with low annual percentage rates that then change unpredictably; predatory advertising that persuade younger, riskier adults to accept credit cards, and late billing which makes it hard for consumers to pay on time.
The annual percentage rate (APR) is what credit card issuers charge consumers for interest while using a card over the course of a year. This rate includes the prime rate, which is the uniform rate by which national banks lend to customers, as well as additional fees determined by consumer creditworthiness. The current prime rate is 3.25%.
But there is evidence that credit card issuers have been spending the period preceding the law’s February, 2010 effective date re-living their heydays in an attempt to gain as much revenue as possible before the law takes away their wild card.
“I looked at my Bank of America [Platinum Plus] Visa card this month and thought, I didn’t even go shopping that much in the past few weeks, why is this bill so high?” said Andrea Mitchell, a nurse at Georgetown University Hospital who was interviewed while off-duty. “I mean, I know you’ll have to take my word for it, but I always pay my balances on time, so I really can’t see any reason that the bill would run up like this.”
Mitchell, who is in her thirties, said, “You never know what these companies are up to, but yea, I’m glad the CARD act is good to go. I think I could stand to gain from it.”
According to Bankrate.com, the average variable rate (or average APR) on new cards rose from 10.69% to 11.22% during the week of Aug. 16. And Michael Kon, a credit card analyst at Chicago-based Morningstar Inc., said that the average APR charged on all credit cards has risen by about 500 basis points (or five percentage points) over the past six months.
The five percentage point rise is a dramatic shift. Before 2009, the average APR rose at a shallower rate of two percentage points, but would always cycle back down, according to the survey. But between March and June, the average APR grew by 3 percentage points, and then by five percentage points during the last two months, according to the Consumer Action 2009 Credit Card Survey.
According to Linda Sherry, director of national priorities at ConsumerAction.org, the dramatic increase this summer is due to the fact that many more people are facing payment delinquencies and defaults. In order to compensate for the loss in revenues, card issuers are now raising the rates on those with both good and bad borrowing habits -- not just those with bad borrowing habits, she said.
The Consumer Action 2009 Survey, released in June, listed the APR rates for 39 popular credit cards belonging to financial institutions, credit unions, and low-rate issuers.
However, a separate look at those cards’ APR rates in June compared to their APR’s in August showed that rates rose on 17 of the cards during the three-month period. Rates went down on five cards. Of the cards whose APR’s rose: five cards rose by four percentage points, one card rose by five percentage points, another rose by seven percentage points.
The prime rate in August is identical to the one existing during the June survey, and so was not responsible for the APR-increases.
Public relations offices for credit card companies are reluctant to provide historical data on APR’s for their products. As a result, the two survey conductors, students Sheree Jones and Kristen Ashby from Virginia Tech, called customer service for the survey information. The two students called separately to verify their information was accurate.
The recession has been difficult for credit card issuers too, hence the madness
Consumer Action, a consumer education and advocacy non-profit organization, said in its report that the downturn has caused banks and financial institutions (credit card issuers) to deal with more delayed payments than usual, causing them to seek other ways of raising lost revenue. Some issuers say that the CARD act will hurt them financially.
“Lenders have said they will lose tens of billions of dollars in penalty interest income when the new credit card law takes effect,” according to a Consumer Action statement.
However, analyst Kon, of Morningstar, says that credit card issuers will hemorrhage even more if they continue pursuing policies that make it difficult for consumers to pay back their balance.
Kon also said that profit-seeking tactics on the part of issuers has helped dampen recent monetary policy set out by the Federal Reserve Board to increase credit availability.
“The federal funds rate has decreased by two percentage points, from 2.25 percent to 0.25 percent in order to encourage people to borrow and spend more,” said Kon. “But since credit card companies can simultaneously raise rates, the effect of the monetary policy is cancelled out, and credit continues to remain expensive.”
The prime rate, a benchmark for the APR, is composed of the federal funds rate, plus three percentage points. The remainder of the APR, which has been recently increasing, makes it difficult for consumers to feel the effect of the lower prime rate.
Though the entire CARD Act will take effect by February 2010, one provision was put in place on Aug. 20
A component of the CARD Act targeting retroactive rate increases on existing card balances is already legally enforceable.
This means that credit card holders will be protected from having the rate increase on their existing balances if their payments are late.
However, issuers can still increase the rate on future purchases. But they would need to warn the consumer 45 days in advance before they do so.
“The rules that will be implemented under CARD are rules that credit card companies could have put into place themselves for the mutual benefit of themselves and their clients,” said Linda Sherry, director of national priorities at Consumer Action. “But recent actions have proven the opposite, and with the savings rate so high, and credit so tight, legislation that will give consumers more confidence to make purchases is more than necessary, it’s essential.”