What Congress giveth, credit card companies are poised to take away.
In six weeks, the final major provisions of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act will take effect. The law prohibits many egregious tactics used by card issuers, such as retroactively raising interest rates on consumers' balances. But issuers have reacted to the sweeping new consumer protection law by quickly inventing new egregious tactics, including raising rates and lowering credit limits on half of all U.S. cardholders.
And that may just be the beginning. Bill Hardekopf of Lowcards.com expects a series of new “gotchas” from card issuers in the year ahead, as they struggle to recover revenue lost to the CARD Act or the economic downturn. Here are six new booby traps consumers should watch for this year.
1) More cards with annual fees
Today, only about 20 percent of credit cards come with annual fees, Hardekopf said, and consumers with good credit can easily avoid them. That will be less true this coming year. Already, Bank of America is surprising some existing customers by adding fees ranging from $29 to $99.
Annual fees need not be so obvious, however. Citibank is demanding $2,400 minimum annual spending from some customers — otherwise, they face a $35 fee.
It's important to carefully watch your bill to see if an annual fee has been added, Hardekopf warns. Otherwise, you might pay the fee unknowingly.
Despite the expected onslaught of annual fees, Hardekopf says consumers should still be able to find annual fee-free cards.
"I believe the credit card industry is competitive enough to where there will be an issuer or issuers who will offer free cards," he said.
Consumers who are tagged with a new fee should seriously consider dumping the card and getting a new one. That should be done with care, however. Never close the old card without receiving a new one first, because closing the card will hurt your credit score and could prevent you from getting a new one. Even closing it later will hurt your score, but probably not enough to exceed an unwanted $99 annual fee.
2) Fixed-rate cards changed to variable rates
It will be harder for banks to raise consumers' credit card rates once Feb. 22 rolls around. There is one loophole: Variable rates will still float up and down in line with the Prime Rate. Since bank rates have nowhere to go but up, variable rate card rates will definitely be going up. Watch the mail for notice that your fixed-rate card is no longer fixed. If you don't like the change, consider switching to a new card – but follow the advice above.
3) Increases in interest rates
Many existing cardholders have already endured rate hikes; now, it's time for new cardholders to get hit. The CARD Act has no limits on the rates that consumers can be charged when applying for new credit cards. Unable to raise rates on current customers, banks will target new customers with higher prices. Why is this important? Consumers who feel jilted will be shopping around, and may not find options as many attractive alternatives as in the past.
4) Increases in existing fees
The CARD Act eliminated some fees, such as over-limit fees, but it did nothing to cap other fees. The best example so far: balance transfers between cards have typically been 3 percent for some time. Last year, Bank of America hiked the fee to 4 percent and recently JP Morgan Chase raised its to 5 percent. Cash advance fees will likely follow suit, and late fees probably won't be far behind.
5) New fees
This is the most alarming area of all.
"Overall, I think fees is the big word for 2010," Hardekopf said. "There are people dreaming up fees right now that you and I have never heard of."
Card companies are taking tips from other industries in their fee-invention schemes, he said. Some issuers are charging $1 a month for paper bills (imitating the cell phone industry). Fifth Third Bancorp recently added a $19 inactivity fee for customers who don't use their cards during a year. (Stockbrokers were the trail blazers on that one.
"Since fees represent such a cash cow for issuers, expect aggressive increases in existing fees as well as some brand new fees on your credit cards," he said.
6) Futzing with rewards
Decreasing the value of rewards points might not sound as harsh as a penalty fee, but it is. Card issuers have myriad ways they can toy with rewards values, and many have begun doing so in earnest. Many miles cards now require more points for travel; some have added "tiers" that make travel more expensive, effectively devaluing the points. Other cuts are more obvious: Cash reward cards that lower their percentage rebate, for example. One of Hardekopf's personal cards now rebates only 1.25 percent of all purchases, down from 1.5 percent.
"I'm an avid user of credit cards. I put everything on my card just so we can get the cash back," he said. "This decrease in rewards is costing us money and I'm irritated."
Better or worse?
While the CARD Act contains many positive consumer protections, it's open for debate whether consumers will be better off after it takes effect than they were before, given the reaction by banks. Hardekopf thinks there's not much room for debate.
"I think consumers are worse off than they were before," he said. "Taken with what the issuers have done in response to the CARD ACT, I do think it has hurt more people than it helped."
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