Caution Ahead: Pitfalls Plenty in New Credit Card Laws

New credit card lawsStarting Monday, U.S. credit card users can breathe a sigh of relief with the long-anticipated compliance by card issuers with sweeping reform legislation.
But don’t let your guard down for long.
Consumer watchdog groups have called them “loopholes.” Other critics of the so-called Credit CARD Act — Credit Card Accountability, Responsibility and Disclosure Act of 2009 — just call them omissions.
By whatever name, the rate or fee hikes that can still be imposed on credit card users should be reviewed and clearly understood by those with existing card balances and those seeking new cards.
Interest Rates
The top potential pitfall: Credit card companies can still raise your interest rate on future transactions. And there is no limit. They only have to give you 45 days notice. But they can’t do it during the first year of a new card account, unless it’s the standard rate clearly stated in the agreement that will follow an introductory rate.
And if your card’s interest rate is variable, based on an index – most commonly the U.S. prime rate used for pricing short-term loan products – then the rate increase restriction does not apply at all.
Moreover, the prime rate is likely to nudge upward in coming months from near historic lows. And many major card issuers have been converting their customers for months to variable rates.
The good news is that the thrust of the reform is a general protection against the retroactive interest rate increase – or rate hikes on existing balances. That can only happen if you are 60 days late. And even then, the card issuer must give you six months to prove you can make your minimum required payments. If you do, the interest rate on the balance at the time of the delinquency must be reinstated.  
Unfortunately, the “penalty APR” can still apply to future transactions once you are 60 days late.
Non-Penalty Fees
Estimates are that credit card companies may lose as much as $15 billion in revenues as a result of the reform laws. But in the nine months since President Obama enacted the legislation, major card issuers have expanded non-penalty fees, such as annual fees or balance-transfer fees.
In the fourth quarter, U.S. households received 398.5 million credit card offers, a 46 percent increase from the third quarter, reported the credit card tracking firm Synovate. Thirty-five percent of the offers carried an annual fee, the highest share recorded by the firm in the past decade.
Penalty Fees
The question of penalty fees is still a very open issue. The Federal Reserve has until July to implement final rules on what constitutes “reasonable and proportionate” penalty fees, as stated by the legislation. Those may include so-called “inactivity fees,” which card issues may argue are “reasonable” to make up lose revenue caused in part by card holders who rarely hold a balance. Critics point to the vagueness of the term and have asked the Fed for very precise definitions.
For now, starting on Monday, the most avoidable penalty fee is the over-the-limit fee. Card holders must allow the credit card company to implement such a fee – or “opt in” –   otherwise a credit card charge will be denied at the point of purchase if it exceeds the limit.
 For an overview of the new reform’s provisions: Fed Finalizes ‘Milestone’ Credit Card Reform Rules
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