On February 22, 2010, the new Credit CARD (Credit Card Accountability, Responsibility, and Disclosure) Act of 2009 went into effect, which essentially provides more transparency and disallows credit card companies from raising interest rates on outstanding balances without due cause. With the new regulations, credit card companies are only allowed to raise interest rates if they give customers 45 days’ notice of the increase, and they must give customers the opportunity to reject the changes. While this certainly is good news, there are a few potential drawbacks and some unanswered questions.
Credit card companies, feeling the impact of the Credit CARD Act, are experimenting with new ways to increase their bottom line. First, many credit card companies are tacking on a charge for customers who don’t use their card frequently enough. This “inactivity fee” is one of many new and creative ways credit card companies are trying to lessen the impact of the Credit CARD Act. As the Credit CARD Act exists now, there is no stopping a credit card issuer from adding an annual fee or reducing credit limits. Same goes for interest rates, while issuers are required to give a 45 days’ notice, there is no national cap on how high those rates can go.
So where do we go from here? It surely means consumers are going to need to monitor their credit card statements more closely and use the cards as to avoid the “inactivity fees,” right? Well”¦not so fast. Luckily, the Federal Reserve Board caught a wind of what the credit card companies were considering and decided to propose a rule to amend the Truth in Lending Act (which is what the Credit CARD Act is a part of) to prevent unfair consumer practices. The Board’s amendment seeks to do the following:
- Prevent credit card companies from charging inactivity fees.
- Require credit card companies to state the reasons for rate increases.
- Prevent credit card issuers from charging excessive punitive fees that exceed the dollar amount associated with the consumer’s payment. For instance, charging a $50 late fee for making a $30 payment late would not be allowed. Under the proposed amendment, the late fee would be a maximum of $30.
- Prohibit companies from charging multiple penalty fees at the same time. For example, charging other fees in addition to a late fee due to one late payment. Under the amendment, the customer would only be charged a late fee.
While what the Board is proposing is certainly a step forward, there are still two omissions ““ annual fees and credit limits. Prohibiting excessive penalty fees and requiring credit card companies to state an explanation behind rate increases is a good start, but it still does not address the issue of annual fees, reducing credit limits, or in some cases, just closing accounts. With that being said, the credit card companies, despite the regulations, will still try to find new ways to maintain profitability.
Here are some steps to avoid penalties by credit card issuers:
- Keep credit cards active. It is a known fact that using credit cards frequently not only builds credit, but keeps the credit card companies happy, because they make money whenever someone uses the card. This could prevent interest rate increases and additions of annual fees.
- Choose cards carefully. Just because credit card companies are getting creative with their fee structure, does not mean that you can’t be creative as well. There are still numerous cards offering rewards programs, such as cash-back rewards and other perks, as well as cards that have no annual fee. Be selective when choosing a credit card. Sometimes a credit card with a lower credit limit but no annual fee would be better than a credit card that offers cash-back rewards and has a higher interest rate.
- Pay on time. Credit card companies are now becoming a lot stricter with their requirements. You’ll need good credit to get the best credit cards with the most attractive benefits ““ so monitor your budget closely and pay your debts on time!
The Federal Reserve Board hopes its provisions can go into effect by August 22, 2010, a full six months after the original Credit CARD Act went into effect. It remains to be seen what the full impact of the Credit CARD Act will be. The amendment put forth by the Federal Reserve Board does not address all of the concerns consumers have, but it is another good step in the right direction. By using common sense and maintaining good habits, problems with credit cards issuers can be avoided.
This is a guest post by Kathryn Katz, a Certified Personal Finance Counselor who works for Consolidated Credit Counseling Services. The non-profit credit counseling agency specializes in debt consolidation and helps consumers that are in financial distress.