New Rules for Credit Card Interest Changes

By Eva Norlyk Smith, Ph.D.

February 22, 2010 is an important day for card holders and credit card companies alike. This is the date on which phase II of the new Credit CARD Act of 2009 steps into effect, including some of its most important provisions, which regulate card issuers ability to increase card interest rates.

The new law limits card issuers’ ability to retroactively raise the interest rate on existing credit card balances, which is great news for anyone carrying credit card debt. Just as important, it does away with the Universal Default clause. Under this clause, card issuers could put your account into default if you missed payments for more than 30 days on any type of bill, be it a utility bill or another credit card bill. This will no longer be the case once the new law steps into effect.

Card issuers, not surprisingly, have been scrambling to increase interest rates for all their existing card holders, in part spurred by the new rules, in part by the increasing defaults they face as a result of by the credit crisis. So much so that members of Congress in September worked to introduce a new bill that would accelerate the implementation of the new provisions and move the effective date to December 1, 2009. Whether or not that will happen remains to be seen.

Irrespective of when the new law steps into effect, the new rules governing interest increases are good news for consumers, because they effectively do away with card issuers’ ability to hike up the interest rate on credit card debt “at any time, for any reasons.” However, no rule is without exceptions, including the credit card law. Under the new provisions, the interest on credit card debt can still change, without notice, if you fall under one of the following exceptions:

You have a variable rate credit card. The interest rate of variable rate credit cards is linked to an underlying index, such as prime, plus a premium. For variable rate cards, the interest rate fluctuates automatically as the underlying index moves; card issuers don’t have to give cardholders any notice of the interest rate change.
In preparation for the new Credit CARD Act, many card issuers have been shifting cardholders to variable rate credit cards. So even if you used to have a fixed rate credit card, this may no longer be the case. Read all correspondence from your card issuer carefully, and if you’re in doubt about whether you have a fixed or variable rate card, call your credit card company.

Your credit card payment is 60 days late. If you’re more than 60 days late with a credit card payment, card issuers can still stick you with default rates at 30+% on all your existing credit card debt.

The end of a hardship arrangement. If you have negotiated a temporary hardship arrangement with your card issuer, your card issuer can increase your credit card APR when the agreement comes to an end.

The new rules govern only the interest rate on existing credit card balances. Card issuers can still increase the card APR for future purchases. However, they can’t do this within the first year after issuing the card, and, they must give cardholders at least 45 days advance notice.

One of the greatest disadvantages of credit card debt has been the inability to do financial planning, because the terms can change at any time, for any reasons. By limiting card issuers’ ability to hike interest rates retroactively, the new rules create some degree of increased certainty for consumers: after the new law steps into effect, if you take on credit card debt, at least you’ll know what interest rate you’ll be paying it off at.

In the meantime, what should you do if your credit card APR gets jacked up in advance of the new law? Read all mail from your card issuer carefully; letters announcing rate hikes usually give you the right to opt out of the new rate and pay down the balance under the old rate. See this article from Bankrate.com about “When to opt out of a rate hike” to determine if it makes sense for you to opt out.

Published: January 17, 2010