Clearing up some misconceptions about the Credit CARD Act


We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Wednesday, January 20th, 2010

There have been many reports about what is and what is not covered by the new credit card law, most of which will be going into effect on February 22nd. The Fed just issued its 1100 page regulation which lays out all the details for how issuers must comply with the law that Congress passed. Naturally, 1100 pages is a lot to digest and the online world is doing their best to summarize things for consumers, but I’ve found a few sources that are describing things a bit inaccurately. I’d like to clarify some of the summaries out there.

This article from the Arizona Republic is correct to say that the law does not protect consumers from everything under the sun, but there are a few mistakes in this summary of the law.

• The rate-raising protections don’t apply when banks issue new cards.

This statement is false. Actually new cards opened after February 22nd will have a brand new protection against rate increases. For the first year an account is opened an issuer can not raise rates AT ALL (unless you are 60 days late in making a payment, your variable rate fluctuates with the index, or a promotional rate ends.) After the first year an account is opened the consumer will continue to be protected against rate increases being applied to existing balances, but issuers can raise rates on future purchases, any time for any reason, as long as they give adequate notice.

• If you do opt out, you might not be able to keep your account as is. Instead, a lender may close your account or put you on a shorter payment schedule, forcing you to retire any balance sooner.

This statement just needs a little clarification. As the author, Russ Wiles notes, the law gives consumers the right to opt out of expensive changes to their card agreement and allows the issuer to close the account in response. But the law limits how quickly they can require you to pay off your balance. Issuers have two choices: 1) allow the consumer no less than 5 years to pay off the balance, OR 2) double the minimum payment and have the consumer pay it off in whatever length of time results. But they can’t increase the minimum payment to more than double what it was before the consumer opted out.

Most of the descriptions by author Brian O’Connell, in this article are correct except the following.

• If you have a good payment history, credit card firms cannot raise your interest rates with two exceptions: when a “teaser” rate expires or when the card comes with a variable-rate hook (card issuers are offering more variable-rate cards already.)

Actually, after the first year a card is open, credit card firms will be able to raise rates for future purchases any time for any reason at all, even if you have a good payment history. All they have to do is give you 45 days notice. But you don’t necessarily have to have a perfect payment history to get protection from rate increases on existing balances. The author forgot to mention that besides variable rates and expired promotional rates, the only other time an issuer can apply an increased rate to an existing balance is if you are 60 days late in making a payment.

• Also, late-payers will be in even hotter water after the card reform rules take effect. For example, if you’re 60 days late paying your credit card bill, the card company can hike interest rates higher than they could before the new credit card law takes effect.

It is false to say that interest rates will be able to go higher than before the law. Just to be clear here, there has never been a cap on how high an issuer can raise rates and the new law doesn’t change anything is this regard.

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