Consumers scored a big win in 2009, when President Barack Obama signed the Credit CARD Act, which consumer advocates say will stop or prevent unfair or deceptive lending practices by banks and credit card issuers. The law is formally called the Credit Card Accountability, Responsibility and Disclosure Act.
Key Parts of Credit Card Reform
In August 2009, two provisions of the legislation were adopted. The first required your credit card company to give you 45-days notice before an interest rate hike, up from 15 days notice. You have the option to reject a rate hike and close the account. Under this scenario, you would have the right to pay off the debt over five years at your original interest rate. However, there’s one big loophole in this change to the law. The 45-days advanced notice requirement applies only to credit cards with fixed interest rates. Unfortunately, more than 90% of all credit cards issued are variable-rate cards. Additionally, just before the 45-day rule took effect in 2009, many issuers of fixed-rate cards started notifying customers that their cards were being converted to variable-rate cards.
Another change resulting from the Credit CARD Act is that credit card companies must also give you more time to pay your bills, by mailing your bills 21 days before due date; not 14 days, as was previously the case.
Even bigger credit card changes begin February 2010, when a host of other rules take place. For example, the credit card reform law prohibits credit cards from being issued to individuals under 18, and prevents credit cad issuers from retroactively increasing your interest rate, unless you’ve been 60 days or more late paying your credit card bill. Also, effective July 2010, new rules from the Federal Reserve require banks to provide better disclosure to their credit card customers.
Banks React to Credit Card Reform By Tightening Credit and Their Policies
Given all these changes, you may have already noticed changes from your credit card company. Many have began imposing various fees, raising interest rates, slashing credit lines or canceling accounts altogether in an effort to manage risk, offset reduced profits, and generate new revenue streams. According to CreditCards.com, in mid-December 2009, the national average interest rate for “bad credit cards” (i.e. cards issued to those with bad credit) was 13.74%. But rates on various cards can go much higher.
One Bank Is Offering a Credit Card With an 80% Interest Rate
Industry observers say the highest-rate card known in 2009 came from First Premier Bank. It began offering a subprime credit card with a whopping 79.9% interest rate. That card, marketed to people with bad credit, had just a $300 credit limit. In a statement, the company’s CEO Miles Beacom defended the unusually high interest rate, saying it was “based on the risk associated with this market.”
But in response to the onslaught of new fees and other activities by banks, members of Congress considered accelerating the adoption of the new credit card laws, making them effective in December 2009, instead of February and July 2010. While that never happened, lawmakers did continue to debate a bill introduced in December 2009 in the U.S. House of Representatives to cap credit card interest rates at 16%. Currently, banks can charge whatever interest rate they like on credit cards, as long as the information is fully disclosed to consumers. Therefore, First Premier’s 79.9% interest rate card is perfectly legally. The company’s CEO said the bank will “allow the customer to make the decision whether they want the product or not.”
Competition, Regulation and Political Forces Will Ultimately Keep Banks In Check
While the banking industry’s move toward more careful risk management and more scrutiny of credit applicants will be a longer-term trend, I expect that the rise of fees and interest rates, and other punitive actions such as arbitrarily closing accounts, will be a short-term phenomenon. Only time will tell. But I predict that political forces, regulatory oversight and competition factors will all help keep banks in check.
Credit Card Reform Levels the Playing Field
For starters, the outcry of consumer opposition to objectionable bank practices is being heard more clearly now than ever. Additionally, politicians and regulators alike are under pressure to rein in unfair banking activities that unjustly enrich financial institutions at the expense of the public. And finally, sheer economic forces will emerge. Banks will become more competitive in the long-run, and try to stand out by dropping excessive fees and unnecessarily high interest rates for good customers. And when one bank stops imposing annual fees, and that practice starts to win over new business, then the rest of the industry will take note and try to do the same thing. On balance, therefore, credit card reform has created a more level playing field, and can be expected to bring more fairness into credit card lending and marketing practices.