Consequences Of The Credit Card Reform Act – Watch Out!

New credit card reform laws are going into effect in February of 2010 to provide more consumer protection.  The reform was put in place to deal with what were some abusive practices of interest rate hikes and fees.

You may recall a post from Pete earlier this year in which he talked specifically about the changes the credit card act will bring forth.  To name a few, it will include consumer friendly regulations around unfair interest rate hikes, unnecessary fees, fairness in timing of payments and enhanced disclosure of terms.

Pete also asked a very important question in his post:  “Could there be unintended consequences?”

Well, already credit card companies are working the system to make sure their profits don’t suffer.  In a recent Business Week article, credit card companies are putting some tricks into play and if you are a credit card user, you need to be aware of them.

Floors For Rates

It will be more difficult for credit card companies to raise rates under the new laws.  According to the article, unfortunately, a lot of credit card issuers are moving customers over to variable rate cards to avoid this legislation.  The credit card companies can limit how low rates can go, so there may not be much benefit when the rate drops (tied to an interest-rate index), but certainly is a benefit if the rate climbs.

Rate Picking

Once the consumer is moved over to a variable rate card, the credit card company may be able to pick a starting rate which is the highest rate for the past 3 months on the interest rate index it tracks.

The result is that borrowers pay an average interest rate that is .3 percentage points higher than before.  The card industry could generate $720 million a year from this shift.

Thresholds Lowered On Fees

With the new law credit card companies must provide a 21 day grace period in making payments before fees can be issued.  Watch out because if you don’t make your payments by that deadline the fees could be even higher than they were before the legislation.  The article mentions that fees generally go up based on the size of the balance.  The largest fees used to be on balances of $1000 or higher and now those fees will start on $250 balances.  Wow!

Unlimited Fees

Balance transfers have often been used to move balances over to a lower rate card.  Using a balance transfer option may now come with a price.  The article states balance transfer fees are being increased.  There used to be a cap for the transfer fee at $50.  Yikes, fewer companies are capping fees and will now just be a % of the balance.

No Use Fees

This one probably disturbs me the most.  As consumers are trying to cut back on spending in general (yeah for savings!) they are being penalized with inactivity fees (boo!).  Some card companies are even penalizing consumers if they close accounts with balances.

Final Thoughts

Pete, unfortunately, I think we’re seeing some of those unintended consequences come to life through these “credit-card tricks”, as Business Week perfectly describes them.

But, my philosophy with credit card use is pretty simple.  These tricks and other problems associated with credit cards go away the less we use them (except now for the no use fees) or choose not to make them a part of our plan.

Personally, my family has a credit card, but we make sure we don’t abuse the use of it.  We don’t spend more than we can pay off each month and never spend ahead on something that we don’t know where the funds will come from to pay.

I think this approach bodes pretty well for avoiding the credit card company trick bag.   You can bet there’ll be more to come with this story as we move into the New Year and the laws go into effect this February.  Check card anyone?

What do you think?  Will there be another set of laws to deal with these new tricks?  Are credit card companies too good at changing the game?