March 23 2010|07.13 AM UTC

Stan Reybern

10 Loopholes The CARD Act Didn’t Close

Category: Credit, NewsTags: ,

On February 22, 2010, credit card users received a much celebrated lift from the Credit Card Accountability Responsibility and Disclosure Act (or CARD Act.) The Act spelled an end to some of the more nefarious practices of banks and creditors, such as silently enabling overdraft “privileges” by default and sudden, unannounced interest rate hikes on outstanding debt, among others. Indeed, the Wall Street Journal called it the “most sweeping change to hit the industry since the first 60,000 credit cards were dropped in California mailboxes 50 years ago.” And while consumers have been waiting for years for an end to these practices, the CARD Act is far from perfect. In the brief time since it took effect, critics have already spotted several loopholes that were not closed by the Act. Today, BillShrink casts a critical eye on the CARD act and spotlights ten loopholes it left open.

Issuers Can Still Raise Rates on New Charges

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One of the most despised practices the CARD Act put an end to was the ability of credit card issuers to raise the interest rates consumers pay on existing balances. For a long time, nothing stopped creditors from raising your interest rate on a current debt from, say, 10% to 12% with little more than a buried in fine print notice in the mail. Unfortunately, the CARD Act was not a complete savior in this regard. For one thing, the lengthy, months-long window between when the Act passed and when it took effect in February gave creditors the opportunity to raise rates then, while doing so was still fully legal. Indeed, many did just that, as the Washington Post reported that “surveys conducted in the months before the law’s enactment found that many issuers boosted interest rates on purchases and cash advances” – even on consumers with “excellent payment histories.” But even now that the CARD Act is law, credit card issuers are still fully able to raise the interest rates you pay on new purchases if “the card carries a variable indexed interest rate or an introductory rate promotion ends.” For instance, you might currently have an outstanding balance on which you pay interest rate X. But if you rack up more debt tomorrow, nothing stops creditors from applying new, higher interest rate Y to that and any future debt spending incurred on the card they gave you. Furthermore, even interest on existing debt can still be raised if you are more than 60 days behind on paying.

No Legal Cap on Credit Card Interest Rates

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Michelle Singletary of the Washington Post also warns that for all the limitations now placed on raising rates for current debt-holders, there still is “no federal cap on the interest rate the card company can charge.” In other words, the interest rates levied on current debts that current debt-holders pay on current credit cards are fixed. But not only can the card companies still raise rates on new debts (including new debts incurred by existing card holders) they can also raise those rates as high as they would like. While it is not clear that a federal cap on credit card interest rates is necessarily ideal, it has been clamored for by advocates of credit card reform for years and the CARD Act did not accomplish it. (Federally insured credit unions, it might be noted, do have a statutory interest rate cap of 18%.) One can make the case, then, that the CARD Act (in this regard) is more a reprieve to current credit card debt holders than a lasting transformation of how the industry will operate going forward.

High-Pressure Tactics to “Opt-In” to Over The Limit Fees

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Another long hoped-for result achieved by the CARD Act was prohibiting companies from automatically letting you breach your card limit and then charging you fees after the fact. Under new rules, credit card holders must explicitly authorize (by “opting in”) their card company to let them do this, and agree to pay any resulting fees. However, reports have surfaced of credit card companies applying great pressure to people to do just that. One such tactic is expressing to consumers how catastrophic it would be if one of their purchases didn’t go through because over the limit “protection” was not enabled. However, this is arguably a deceptive way to induce consumers into opting in. Presumably, if someone was unable to make a purchase because the price surpassed their credit card limit, that person would then have two choices. One would be to realize the purchase would have taken them above their limit and delayed making it, and the other would be to call their credit card company (without any outside pressure) and opt-in if and when it made sense to them. Consumers who are goaded into opting in before it ever becomes an issue will be, in this respect, no better off than if the CARD Act did not exist.

Questionably Strengthened Student Lending Provisions

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Credit card reform advocates have for years decried the ease with which students can get credit cards (despite being ignorant of debt as a group), and the zeal with which credit card companies target them. And admittedly, the CARD Act represents a modest improvement in this area. University of Washington newspaper The Daily, for instance, spoke of “background checks” put into place by CARD which require applicants between 18 and 21 years old “to find a cosigner or present evidence of a steady income or another source of payment.” But the Wall Street Journal isn’t convinced that CARD does enough to protect students. In their article on whether loopholes exist in the new laws, the WSJ says CARD “still leaves some authority to the Federal Reserve Board to interpret the law”, which could open the student protections mentioned above to subjective human judgment and poor enforcement. For instance, rather than it being flatly illegal for an 18-21 year old to have gotten credit without the background check, the loosened interpretation might allow for judgments about whether a particular 18-21 year old “really” needed the background check.

Late & Penalty Fees Can Total More Than 25% of the Initial Credit Limit

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The CARD Act succeeded in prohibiting credit card companies from assessing annual fees or application fees that exceeded 25% of your initial credit limit. That means in practice that if you have a credit limit of $1,000, fees charged during the first year cannot exceed $250. This put an end to the long-scorned practice of people being stuck with fees that took substantial bites out of their credit limits, and in fact reduced the credit available to them for use after the fees were paid. Regrettably, this restriction does not apply at all to penalty fees, such as late fees. In fact, given all the restrictions put into place by the CARD Act on the interest rates companies are allowed to charge and the advance notice that must be provided, it’s not out of the question to imagine penalty fees growing to be higher than they have ever been, as creditors strive to recover lost revenues. Indeed, given that penalty fees are exempted, new such fees could even be added to future credit card agreements, with little resistance from the CARD Act or other laws.

Loosened Restrictions After 60 Days

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As much as the CARD Act was roundly praised by reform advocates, it was roundly condemned for how long it took to become law. What many still do not know, however, is that some parts of the law are still (at time of writing) not in effect. For example, we reported earlier that consumers who are 60 days late making payments on existing balances can have their interest rates hiked, even under new laws. But while those consumers are eligible to get their old, lower rate back by making timely minimum payments for six months, this provision itself does not become law until August. Conveniently, there are exactly six months from February, when the Act as a whole became law, and August, when this provision also becomes law. Consequently, card holders who were promised the ability to earn back lower rates with prompt repayment must now wait for months to do so, during which their card company can charge any rate they want, even though the CARD Act has passed. This is indicative of a broader fact about the CARD Act, which is that being late 60 days or more on a payment exposes consumers to a kind of “no man’s land” devoid of new protection.

How Long it Took to Become Law

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We have mentioned several times the fact that the CARD Act was signed in May 2009 but did not take effect until February 2010. However, the lengthy delay from creation to implementation is more than just a cynical reflection on politics or business. A rather strong case can be made that announcing such a sweeping and adverse (from the credit card company’s standpoint) law many months in advance actually worsened things for vast numbers of current debt holders. Despite the various benefits to current consumers, CARD hurts bottom lines of credit card companies. And naturally, these companies did not sit idly by and wait for their revenues to be snatched away. Rather, they took the actions reflected in the countless media stories leading up to February – slashing credit limits, raising interest rates, instituting new fees, aggressively marketing to unsophisticated people with poor or no credit, enacting shorter expiration periods and earnings caps and more. Indeed, delaying the implementation of the CARD Act for so long arguably accelerated these things, as they were not being done with anywhere near such frequency before CARD’s impending passage made headlines. Curtis Arnold, head of CardRatings.com, said in May 2009 that “we’re in uncharted territory here” regarding the blizzard of reactive rate hikes and credit limit reductions.

Does Not Apply to Business or Corporate Credit Cards

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Presumably because business and corporate customers are assumed to be more sophisticated (and thus less requiring of regulatory protection), the CARD Act does not apply to these credit cards. It remains to be seen whether or how much practical effect this has on the business community. Relatively little has been heard from this segment of society about the new protections of the CARD Act. However, as small businesses comprise a large chunk of the national economy, it could conceivably become an issue if the same people who (as consumers) are protected are later penalized as business credit card holders who are not covered by the same rules. Then again, since many small business owners operate as sole proprietors and personally guarantee their credit, it may not become an issue at all.

Overdraft Rules Don’t Apply to Automatic Bill Pay

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A long-sought protection achieved by the CARD Act is prohibiting banks from automatically enrolling you in their overdraft “protection” programs – that is, letting you spend more than is in your account and charging you a fee, whether you explicitly wanted this ability or not. No longer is this allowed. The Federal Reserve, though, warns that this does not apply to checks or automatic bill pay arrangements. For instance, if you have authorized your bank to automatically pay from your checking account regular bills like “mortgage, rent, or utilities”, your bank is still fully allowed to “automatically enroll you in their standard overdraft practices for these types of transactions.” Of course, you can still, as before, call your bank and request to opt out of this protection, even though it is not automatically done for you by the new CARD Act legislation.

Exceptions to Double-Cycle Billing Prohibition

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While CreditCards.com reports that double-cycle billing (which is when finance charges for your current payment are calculated using both your current balance and last month’s balance) has been prohibited by the CARD Act. Unfortunately, FreeShipping.org reminds us that “double-cycle billing can technically still be applied to credit cards that don’t have grace periods.” Nor is this a minor technicality, as the new, more stringent credit card laws could in all actuality make companies less willing to issue cards that have grace periods in the first place. As a result, the promised protection from double-cycle billing could, in fact, result in a net increase in double-cycle billing if the industry adapts by issuing far less cards with grace periods attached to them.

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{ 1 comment… read it below or add one }

bobby glen March 23, 2010 at 6:37 pm

When it comes to stealing its hard to be a LAWYER! The better the lawyer, the more he can steal without getting caught!

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