By Iris taylor
Published: February 21, 2010
After years of abusive practices by some
credit-card companies, consumers may finally get some relief tomorrow
when the new Credit Card Act takes effect, ushering in badly needed
reforms, consumer advocates say.
"The winners are consumers, and the losers are credit-card companies
who cheated consumers," said Ed Mierzwinski, director of the consumer
program with the federation of state Public Interest Research Groups in
Washington.
The Credit Card Accountability, Responsibility and Disclosure Act of
2009, signed into law by President Barack Obama, "does tweak a lot of
things that will help consumers," said Linda Sherry, director of
national priorities for Consumer Action in Washington. But "it really
doesn't go far enough.
"It removes a major harm, which was the repricing of balances," she
said, referring to the industry practice of raising rates on existing
balances to mitigate risk.
But credit-card issuers still "can basically do whatever they want"
--increase rates, impose and raise fees, close accounts and drop credit
limits with the proper notice, she said.
Obama signed the legislation on May 22. Some aspects of it took
effect in August, but most of its provisions debut tomorrow.
The law affects a wide swath of Americans; 78 percent of U.S.
households held one or more credit cards in 2008.
Many card companies took action ahead of the provisions, raising
interest rates, changing them from fixed to variable, and making other
adjustments to terms.
Consumers are ready for relief.
"After over 15 years of perfect credit -- never late even one time on
any bill, also never, ever over the limit on any account -- the reward I
get from Wells Fargo, Citibank and Chase is higher rates and lower
limits," said William Conrad of Smithfield.
The card companies raised his rates from "in the teens to 28-29
percent" last fall, Conrad said. "For someone with perfect credit, I
find that disheartening in the least."
Chris Lombardo, an employee of Henrico County-based ClearPoint Credit
Counseling Solutions, said Bank of America hiked his rate last year
from 9¼ percent "all the way up to 20 percent.
"They said, 'Your account got flagged for some unusual purchases,'"
Lombardo said. "They said I had two options -- accept the change in
terms at the new rate, or I could go ahead and allow them to close the
account. We kept the current rate, and I paid off the account."
The law contains many protections that will help consumers like
Conrad and Lombardo. They include:
•Card issuers can increase rates on new balances only after providing
a 45-day notice and the right to opt out. •Issuers can raise your rate
for paying late only if you're 60 days late. They cannot charge interest
on late and over-limit fees. •They must, on cards with multiple
balances, apply any payment over the minimum to your highest-interest
balance first. •They have to mail your statement 21 days before it's
due, seven days longer than before, and they cannot tack on a fee if a
holiday or weekend makes the payment late. •They must disclose how long
it will take to pay off your debt if you pay only the minimum, and how
much it costs to retire your debt in 36 months. •They can't charge
over-limit fees unless you say it's OK. •Approved credit counselors must
be listed on the back of each statement in case you need their help.
•College students cannot be duped into getting a credit card with free
gifts anymore. They have to prove they can pay -- or else get a
co-signer. •Your payment will be due the same day every month, such as
the 15th or 30th. Previously, "due dates were moving targets," Sherry
said. The clear winners of the Credit Card Act are consumers who carry a
balance on their credit cards and struggle to pay their bills. Those
are the ones who have been preyed on by credit-card companies for years,
Mierzwinski said.
The losers are consumers who use their cards wisely and pay off their
balances each month, said Bill Hardekopf, CEO of LowCards.com in
Alabama. Despite their responsible card behavior, many will get hit by
general increases in fees and rates, new fees, and cuts in reward
benefits as the industry seeks to shore up its bottom line.
Credit-card charge-offs are hovering around 10 percent, said Peter
Garuccio, spokesman for the American Bankers Association in Washington.
"You can't make it up in volume," he said. "You have to charge
everyone a little more in order to cover those losses."
After the act was signed into law, credit-card issuers got busy
getting rid of riskier customers and those not using their cards.
They hiked fees and rates, lowered credit lines, closed accounts and
imposed new fees -- whatever they could to raise money before the Feb.
22 implementation date.
Travis Plunkett, legislative director for the Consumer Federation of
America, said "the banks argued before Congress that this is a
complicated law and they needed sufficient time to properly implement
it."
Instead, they used the time "not so much to comply but to sharply
raise rates on consumers," he said.
Hardekopf said, "They're going to find other areas of making
revenues. 'If you're going to restrict me from making money over here,
I'm going to make it over there.'"
Most consumers were aware that new credit-card protections were
coming at some point, according to a survey released this month by the
Consumer Federation of America and the Credit Union National
Association. But they didn't know when -- and they were confused about
what the reforms would be.
Credit-card issuers say the rules restrict their freedom to adjust
prices based on customer risk and changing market conditions.
Yet the financial impact on the industry as a whole will be minimal,
said Morningstar senior analyst Michael Kon in Chicago.
Within the industry, "the impact won't be even," he said. Some
issuers have limited exposure to the practices that will be prohibited
by the act tomorrow, and they will do fine, he said.
"On the other hand, if an issuer focused on subprime customers and
were employing some of the practices covered by the [Credit] Card Act,
they will be impacted severely," he said.
Pam Girardo, spokeswoman for the McLean-based credit-card issuer
Capital One, a major employer in the Richmond area, said the act
"represents sweeping changes to the credit-card industry.
"There will be a shift away from penalty fees and penalty repricing
and toward embedding the economics in the . . . APR and annual fees,"
she said. "That's what the act intends, and it is a direction that
Capital One has been moving toward for years."
Kon said he thinks Capital One "will be fine. Growth will be a huge
challenge for them just like any other issuer.
"Overall, I think their profitability will be slightly lower than in
the past," he said. But "I think they're well-prepared to price their
cards to incorporate the new rules."
