New credit card laws take effect, but higher rates plague consumers

When the new credit card laws officially start today, millions of Americans will see a host of improvements on their accounts; unfortunately, many have already begun to see higher interest rates. Anticipating the changes, many credit card companies have spent the last few months rushing to raise raise rates before the first changes take effect.

In the past few months, credit card companies have been racing to raise interest rates on millions of credit card holders. People with cards from American Express (AXP), JP Morgan Chase (JPM), Citigroup (C), Discover (DFS), Capital One (COF) and others have been reporting increases even if they've never made a late payment and have excellent credit scores. At this point, it looks like all cardholders who carry balances from month to month will see their credit card costs increase.
Starting today, credit card issuers must mail bills 21 days -- rather than 14 days -- in advance and they must give customers 45 days notice before raising interest rates. Before this provision in the Credit Card Accountability Responsibility and Disclosure Act (CARD) took effect, credit card companies only had to give a 15-day notice of a rate increase.

In the past, by the time cardholders learned of a rate increase, there often wasn't much time to protest. Even if they chose to do so, they only had two options: paying off the account or locking in the current rate by agreeing to close the account. For many struggling to meet bills after a job loss or other emergency, neither of these options were viable.

Another change has been in minimum payments. JP Morgan Chase just changed the rules on people carrying balances of $5,000 or more. Rather than being required to pay 2.5 percent of their balances each month, cardholders must now pay five percent.

For people who have lost their jobs, rapid interest rate increases and minimum payment changes put even more strain on their budget and will push them even faster toward bankruptcy. Individual bankruptcies are up 36 percent as of April 2009 versus April 2008.

Unsurprisingly, these credit card changes have accelerated cardholder default rates. Bank of America reports the highest default rate at 13.8 percent. Others, including Chase, Citigroup, Capital One, Discover and American Express report default rates between 8 percent and 10 percent.

Many credit card issuers are getting rid of fixed rate cards completely and instead offering variable rate cards set to an index. That way they don't have to send notices at all. As the index rate goes up, so does the credit card rate. This method enables them to avoid the protections in the new law.

Now that the first changes have gone into effect, credit card companies are looking for ways to avoid the law changes that take effect in February 2010. These include:

* A ban on marketing to students under age 21 unless their parent co-signs or the credit card company has proof that the student earns enough money to pay the bill.

* If there is a an interest rate hike, it cannot be applied to an existing balance.

* If a card has balances at a variety of rates, payment must apply to the portion with the highest rate first.

* Many credit card companies charge fees if users go over their limits. Under the new law, card companies must allow customers to opt out of this practice.

* Double cycle billing will be banned. This is a practice by which credit card companies would use their customers' average daily balance from the current and previous month to calculate finance charges.

Changes to gift cards will take effect next summer. One change will be that gift cards must be good for at least five years; right now many expire after one year or less. Also, there will be limits on the fees that can be charged on dormant or inactive gift cards.

Also, as the credit companies' latest account changes demonstrate, cardholders can expect to see more fees added on to their accounts. For example, some cards are starting to charge a fee to reinstate rewards points if customers are late on a bill, and it seems likely that they'll find other fee innovations before the new law takes effect in February 2010.

While CARD my help some consumers, it would have been far more useful if its provisions were enforced immediately upon passage. When it gave the credit card companies so much lead time, Congress also gave them the opportunity to figure out ways around the changes before the bill took effect. Ultimately, with higher fees and interest rates pushing more customers in default, everyone loses -- including the credit companies.

Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Improving Your Credit Score."

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