Credit Card Reform-Too Little Too Late

By Eva Maria Norlyk

In setting his goals for credit card reform, President Obama expressed his desire to end card issuers’ power to change the terms “at any time, for any reason.” So, did the new credit card legislation signed into law at the end of May 2009 accomplish this goal? The answer to that, unfortunately, is a BIG question mark. While the CARD Act of 2009 is a step forward, the new legislation also falls short in significant ways.

If the bill had been put into effect the day after it was signed, it would in many ways have succeeded in what it set out to accomplish. However, for the more important provisions, credit card companies will have more than a year, until August 2010, before the new rules step into effect. That time gap amounts to giving credit card companies a big, gaping loophole through which to escape most of the provisions with real teeth.

The most fundamental flaw of the new legislation is that it fails to put a cap on credit card interest rates. One of the key issues of the credit card industry has been the legalized right to charge usury-like interest rates. And while the new legislation puts curbs on when and how the industry can increase interest rates, it does nothing to limit card issuers’ ability to charge interest rates in excess of 30%. An amendment to put a ceiling on credit card interest rates at 15% was rejected by the Senate by an overwhelming majority.

The new legislation does put limits on when and how credit card companies can raise interest rates. Starting in August of 2010, card issuers will no longer be able to increase the interest on existing credit card balances, unless the cardholder falls 60 days behind on payments on any bill, not just their credit card bill. Credit card companies will be able to raise interest rates on future purchases at their discretion, as long as they provide 45 days notice. Further, credit card companies will not be able to increase interest rates at any time in the first year after issuing a credit card.

Let’s take out our crystal ball to predict just how the time gap will affect the new curbs on card issuers’ ability to increase interest rates. Over the next year, what is likely to happen? In preparation for restrictions on how and when interest rates can be raised, card issuers will be scrambling to increase interest rates before the door closes. Expect to see new credit cards issued with much higher purchase APRs. Interest rates of 24.99+ percent used to be thought of as usury; now, rates in that range could well become standard.

Worst, folks with existing credit card balances are likely to see their APRs skyrocket. There is nothing in the new legislation to limit credit card companies’ ability to jack up interest rates on current cardholders before the new legislation steps into effect. About three out of five credit card users carry a balance on their card, and that balance averages more than $7,000—a sizeable balance that many cardholders will be unable to pay off, even if the interest rate increases.

Prior to the final approval of the new credit card legislation, card issuers were already making plans for damage control by changing interest rates from fixed to variable rates, reducing the length of low-rate introductory offers, and starting new cardholders out with higher initial interest rates. This is a trend that will likely accelerate over the year to come.

What can you do to protect yourself from credit card interest hikes? Between now and when the new curbs on interest increases step into effect in August of 2010, it’s more important than ever to play by the rules. Avoid any little misstep that fits the profile of high-risk credit card users, such as paying a credit card bill late, keeping high balances on your credit cards in relation to the credit limit, or paying just the minimum monthly payment.

It remains to be seen whether this will be enough. Interest rate increases may continue to just focus on cardholders that show greater risk, or, because of the upcoming curbs on card issuers ability to raise rates, they may target cardholders across the board. So the best bet of all is to do everything you can to get rid of your credit card debt to avoid being trapped with high debt at high rates.

Published: August 7, 2009