Part 1 of 2

I’ve spoken a lot recently about what credit card issuers are doing before the Credit Card Reform Act goes into effect next February. They’re justifying their practices by saying that their revenues are suffering with the ever increasing unemployment and default rates. Sadly their solution is to penalize the paying customers. Here’s a list of specific things to watch out for in handy “10 things to watch out for” format.

• Increasing interest rates. The phrase of the day with the card issuers seems to be “any time any reason” price changes. This isn’t just happening to sub-prime customers either. One of the major banks just raised the interest rate on their low risk prime cards to 29.99%. Interest rates like this have been ridiculous in the past even on sub-prime cards. Rates for sub-prime cards are even worse.

• Penalty rates are going up. Those are the rates that are put in place if you’re late, go over your limit, etc.

• “Unprofitable” accounts are being shut down or getting their limits reduced. In other words, people that pay their cards off each month, denying the card issuers interest and penalty fees, are being closed down. The issuers want to keep the people that carry balances and are late here and there.

• Cash advance and balance transfer fees are skyrocketing to all time highs. The days of no cost, 0% interest balance transfers are long gone, and those “convenience” checks are going to significantly increase the real cost of your purchases.

• Annual fees are being added and increased. Last year less than 20% of credit cards had annual fees, but it’s predicted that by February nearly all credit cards from the big banks will have them. The cards that already had annual fees are seeing them doubled, tripled, even quadrupled.

• Fixed rates are being changed to variable rates. In the past with fixed rates meant that if the prime interest rate went up your rates remained the same, decreasing the profits of the banks, but now if the historically low prime interest rate goes up (which it will since it can’t really get any lower), your rate will go up. If prime is 3% and your rate is prime +24.99%, and prime goes to 6% your rate goes to 27.99% instead of staying at 24.99%. Oh, and the best part, there’s no provision for the rates to go back down. So if prime goes back to 3%, your interest rate doesn’t go back to 24.99%.

• The banks are changing the terms of their special fees to make them all inclusive. For example, banks charge a special fee for “international transactions” in other forms of currency, but they’re changing the terms so those fees apply even when the transaction is still in American greenbacks.

• They’re making rewards an endangered species. Cash back rewards are being lowered or eliminated while things like airline miles are getting tougher restrictions making it harder, if not impossible, for people to use them.

• The banks are getting creative and creating new fees in addition to the old ones. Not using your card? Here’s an inactivity fee. Not using it enough? Have a low activity fee.

• The banks are closing cards with no notice. That’s means you might not even know until you go to use the card and your transaction is embarrassingly declined.

I’ll follow this up tomorrow with some suggestions on how to protect yourself.

The House voted today to hasten the enactment of fresh rules for credit card companies after constituents complained of a drastic rise in interest rates and steep new fees.

The bill, approved 331-92, will force credit card companies to meet the terms of the new rules at once unless they agree to stop increasing interest rates and fees.

The bills chances in the Senate are weak; where several Senators worry that a short deadline would hurt the industry and limit the availability of already scare credit.

All the same, Wall Street seemed to take notice of the House’s vote, sending bank stocks tumbling in the last hour of trading today immediately following the House vote

Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, was quoting as saying “This is both real and a lesson to them”. Many feel this is a warning to the banks to back off their predatory practices.

The Credit Card Reform Act was signed into law earlier this year and was designed to protect consumers by regulating interest rate increases, the issuance of cards to people under 21, and the way information and what information is presented in communications from lenders. The downside was many in the Senate felt the rules were too harsh, so the banks were given 9 months to prepare for the changes. Instead they used the 9 months to wring consumers dry while it was still legal. Recent studies have shove that interest rates have risen by 20% in the past year on average. It seems odd that the banks argued that they needed months to enact the new rules, but have the business agility to enact rate increases and credit limit reductions almost instantaneously.

Reprinted from The Pew Charitable Trusts
Written by Kip Patrick

Washington, DC – 10/28/2009 – One hundred percent of credit cards offered online by the leading bank card issuers continue to include practices that will be outlawed once legislation passed in May takes effect next year, according to a new report by the Pew Health Group’s Safe Credit Cards Project. The report also found that advertised credit card interest rates rose an average of 20 percent in the first two quarters of 2009, even as banks’ cost of lending declined. With the Federal Reserve currently developing rules to ensure penalty charges are “reasonable and proportional” as required under the Credit CARD Act, the report also includes policy recommendations for regulators.

“Since passage of the Credit CARD Act, we found that credit card issuers have done little to remove practices deemed unfair or deceptive by the Federal Reserve,” said Shelley A. Hearne, managing director of the Pew Health Group, which oversees the project. “In fact, some of the most harmful practices have actually grown more widespread–not one of the bank cards reviewed would meet the legal requirements outlined in the Credit CARD Act, which is bad news for consumers.”

The new report, “Still Waiting: ‘Unfair or Deceptive’ Credit Card Practices Continue as Americans Wait for New Reforms to Take Effect”, examines all consumer credit cards offered online by the largest 12 bank issuers in America. These banks control more than 90 percent of outstanding credit card debt nationwide. The report also reviewed cards offered by the largest credit unions. The Pew Safe Credit Cards Project gathered data from July of this year on nearly 400 cards, building on its previous research from December 2008.

Key findings of the report show that:
• 99.7 percent of bank cards allowed issuers to increase interest rates on outstanding balances – a jump from 93 percent in December;
• 95 percent of bank cards permitted issuers to apply payments in a way the Federal Reserve found likely to cause substantial financial injury to consumers; and
• 90 percent of bank cards had penalty rate hikes with the vast majority imposed by “hair triggers” of one or two late payments in a year.
“The Federal Reserve must ensure that the rules it is developing will prevent unreasonable or disproportionate penalties, including penalty rate increases, which our data show remain far too common,” said Nick Bourke, manager of Pew’s Safe Credit Cards Project.

In July, median advertised annual percentage rates (APRs) for purchases on bank issued cards were between 12.24 and 17.99 percent, compared to a range of 9.99 to 15.99 percent in December 2008 (issuers advertise a range of rates depending on applicant credit profiles). Compared to December of last year, lowest advertised bank rates grew by more than 20 percent, while highest advertised rates grew by 13 percent. Pew’s previous report identified that issuers raised rates on nearly one-quarter of existing accounts, costing consumers a minimum of $10 billion in a one-year period between 2007 and 2008.

“Still Waiting” also provides the first comprehensive comparison of bank cards to those issued by credit unions, based on advertised terms and conditions. The analysis showed that credit unions offered much lower APRs, less punitive penalty rates and engaged in far fewer unfair or deceptive practices than their commercial peers.

To ensure that the Credit CARD Act is implemented to meet its goal of safeguarding the consumer, the report outlines policy recommendations for the Federal Reserve and other regulators to ensure that the new rules under development will:
• Regulate penalty interest rate increases in its rules governing “reasonable and proportional” penalty fees and charges in accordance with the law;
• Scrutinize partially variable rates, which can increase when the index rises but cannot drop below a minimum set by the issuer; and
• Eliminate credit card penalties that are not aligned with achieving the Act’s primary goals of protecting consumers against risky practices.
“When the Credit CARD Act takes effect next year Americans can expect to see safer, more transparent cards,” said Bourke. “How well the new law works, however, will depend significantly on how the Federal Reserve creates new rules under the law to protect consumers. In the meantime, issuers have the opportunity to move as quickly as possible to ensure their products are clear of the unfair and deceptive practices that unfortunately remain part of every card we reviewed for our report.”

The Pew Safe Credit Cards Project (www.pewtrusts.org/creditcards), part of the Pew Health Group, develops and promotes standards for consumer-friendly credit cards to help ensure the financial security of all Americans. The Pew Health Group is the health and consumer product safety arm of The Pew Charitable Trusts, a nonprofit organization that applies a rigorous, analytical approach to improving public policy, informing the public and stimulating civic life.

Consumers need to be especially vigilant about their credit cards for the next few months.  I’m sure you’ve all heard that major regulatory changes were signed into law back in May, 2009 regarding how credit card companies can operate, but keep in mind the law does not go into effect until February, 2010.  That means the credit card companies still have 6 more months of business as usual.  Here’s a few things be careful of in the meantime.

• After the law goes into effect “universal default” will go away, but it’s still in place now.  Universal default is a practice were credit cards companies B, C, D, and E all raise your interest rates after you pay credit card A late.  So be especially careful about getting those bills paid on time.  Which brings us to the next point, due dates.

• After February, the credit card companies will have to give you at least 3 weeks from the billing date to make your payment before you’re late, they won’t be able to arbitrarily change the billing date, and it will be illegal for them to set the bill due at, say, 11:00 AM when they know the mail doesn’t come in until 2:00 PM.  So that means in the meantime they can do all of those things.  Be sure you open your statements when they arrive and check the due date on them.  If you’ve forgotten to mail a payment out and realize that you aren’t going to be able to get it to them in time, you might need to suck it up and pay one of those astronomical phone pay fees, because if you don’t you might just see the rates on all your other cards go up because of universal default.  Your cards going from 12.99% to 24.99% is going to cost you a lot more than that $35.00 phone pay fee.

• Know your credit limits and balances.  Come February you will be able to “opt-out” of exceeding your credit limit.  Your purchases will be denied if they exceed your limit.  Right now though, credit card companies can still approve transactions that put you over the credit limit, allowing them to charge ridiculous over limit fees, raise your rates, lower your limits, etc.  You’ve got to protect yourself until then though, by being aware of how close you are to your limits.

So make sure you’re reading your bills carefully.  That doesn’t mean that after February everything will be hunky dory and you can just sit back and trust the credit cards companies to do the right thing, which of course is ridiculous.  The best person to protect you from unfair business practices isn’t the government; it’s you, so regardless of regulations watch out for yourself.  Use some good old fashion common sense—spend only what you can afford, pay your bills on time, and don’t let anyone take advantage of you.