By Doreen Hemlock
Sun-Sentinel Staff Writer
A new credit card law takes full effect Monday with stronger
protections for consumers, but borrowers beware: the law could result in
higher interest rates and increased fees on many cards.
The law
tightens the rules for raising rates and fees, likely cutting profits
for issuers. Companies may try to make up those losses by issuing new
cards that charge higher rates and fees at the outset.
To comply,
issuers must give 45 days' notice before making major changes in terms
on your card. You can choose not to accept changes. But if you reject
new terms, the company may ask you to stop using the card and increase
monthly payments on your balance.
Surveys show many borrowers are
confused about what the law allows and doesn't.
Here's a primer,
focusing on what consumer advocates say.
1. The law does not stop
companies from raising your credit card interest rate.
New rules
makes it harder for companies to raise the annual percentage rate on
your card.
Companies generally can't raise the rate during the
first year an account is open or raise the rate on your existing balance
— unless you're more than 60 days late in paying or your introductory
rate expired.
But they can raise your rate after the first year
for new purchases — with advance notice.
They also can raise your
rate in the first year if your rate varies based on an index and if that
index rises. Indexes, such as the prime rate, now sit at low levels,
but they may increase later. Some consumer groups expect more issuers
will shift from fixed to variable rates, so they can more easily raise
rates.
Polls show many people think the law bans companies from
raising your rate if you pay at least the minimum amount on time. One
survey found 42 percent of respondents aware of the new law thought
companies must set your rate based on how you pay them — not how you pay
others. But those people are all mistaken, said Travis Plunkett,
legislative director at the Consumer Federation of America.
"If
your credit card companies wants to increase your interest rate because
you didn't pay someone else on time -- or your credit score drops, they
still can," Plunkett said. "Many people think that's unfair."
2.
The new law does not limit the level of interest rates companies can
charge.
The new legislation does not cap interest rates at a
maximum level. It also doesn't limit the size of a rate increase.
Companies can raise your rate by 10 or 20 percent or more in one leap,
if they want.
Some consumer groups had sought a cap on the maximum
interest rate; others had not.
Advocates argued a cap would limit
what consumers pay. But critics said a cap only on credit card rates
could push more people with weak credit to other lenders who charge even
more, such as pay-day lenders or pawn shops. Some groups want a cap on
rates for all lenders, not just credit cards.
"If you're going to
cap credit cards, cap all forms of credit, so all lenders are treated
the same way, and no creditor can get away with high-cost loans that can
be unsustainable and harmful," said Plunkett of the Consumer Federation
in Washington, D.C..
3. The new law does not limit total fees
that credit card companies can charge.
The law tightens rules on
many fees including the "over-the-limit" charge, and it requires advance
notice to change fees. But it does not limit the total amount of fees
that companies can charge.
Many consumer groups expect companies
to add new fees to offset income lost from tighter rules.
For
example, the law stops companies from automatically charging an
"over-the-limit" fee when a borrower exceeds their credit limit. The
cardholder must agree in advance or "opt-in" to pay that fee.
"No
more charging a $5 latte that puts you over the limit and you get socked
with a $35 fee, unless you sign up for that fee," said Greg McBride,
senior financial analyst with Bankrate.com, senior financial analyst at
Bankrate.com, a personal finance Web site based in North Palm Beach.
Credit
card companies say tighter rules on rates and fees limit their ability
to adjust to changing risks and will cost them dearly. JPMorgan Chase,
the country's largest card issuer, has estimated the new law could
reduce its credit card revenues by as much as $750 million this year.
The industry overall could take a hit up to $5.5 billion this year,
credit card advisory firm R.K. Hammer has forecast.
To make up
some income, companies likely will raise fees on balance transfers, cash
advances and foreign exchange transactions and invent new charges,
consumer advocates say.
"Some companies will institute annual
fees," said Ed Mierzwinski, consumer program director at the U.S. Public
Interest Research Group in Washington, D.C. "That will hurt convenience
users, who pay off their balances every month but use the cards as a
convenience."
4. The new law can't stop card companies from trying
to evade the rules or find loopholes.
Consumer groups say the new
law bans some of the worst abuses by credit card companies, but some
issuers may seek to skirt tougher rules. Some already have changed terms
on cards before today.
For example, one company last year set a
very high introductory interest rate, but offered a big rebate to
customers who pay on time. If you pay late even by a day or two, you're
back at the high intro rate. Some critics saw an evasion of new rules
that make it harder to raise rates on existing balances.
A
different company recently eliminated their "over-the-limit" fee. But if
you pass your credit allowance, the next bill asks you to pay the full
amount topping the limit — or will assess a "late fee" on that full
amount. That move seems to give an old fee a new name, said the National
Consumer Law Center.
"Even if you read all the new changes in
terms that are coming stuffed in credit card bills, chances are the
disclosures will not reveal the tricks hidden inside," wrote Linda
Sherry, the Law Center's Director of National Priorities for Consumer
Action in a recent appeal for tighter oversight of card companies.
5.
The new law does not stop credit card companies from marketing to
people under age 21.
Consumer advocates have criticized card
companies for aggressively marketing to youth, who may amass big debts
without fully realizing the consequences. The new law restricts
companies from issuing cards to people younger than 21 unless the minor
shows the income to pay or has a co-signer, such as a parent. The
co-signer also must approve an increase in credit limits on cards for
the youth.
But companies can still market credit cards to college
students with free pizza and other incentives, critics say. Many
consumer groups urge more financial literacy programs in schools and
stronger consumer protections in general, perhaps through a Consumer
Financial Protection Agency, to better protect youth and other
borrowers.
Consumer advocates say whatever your age, take the time
to study and secure the best deal.
"Consumers have the ability to
vote with your feet," said Bankrate.com's McBride. "Shop around for the
best credit card you can qualify for."
