WASHINGTON — U.S. consumers will get long-awaited relief from some of the most costly and deceptive credit card tactics when the sweeping provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 finally kick in on Monday.
The CARD Act, which President Barack Obama signed last May 22, dramatically changes the way card issuers can profit from plastic.
Instead of arbitrary rate hikes, exorbitant fees and murky calculations of interest charges, card companies must now be more transparent in establishing and disclosing the terms of their offerings, and, as a result, more prudent in the way they manage credit risk.
In response to the law, most issuers already have introduced a host of new fees and rate structures to recoup some of the revenue they'll lose under the new rules. The changes will make credit not only harder to get, but also more expensive.
For example, 35 percent of the card offers mailed to U.S. households in the fourth quarter of last year carried annual fees. That's the highest percentage in 10 years, according to the marketing research firm Synovate. Those offers had an average annual interest rate of 13.5 percent, the highest in five years.
The CARD Act won't silence all consumer gripes about credit cards, but it will save cardholders billions of dollars and usher in, for many, a welcome new era of tougher industry scrutiny from lawmakers, regulators, consumer advocates and customers.
"What this says to the card industry is, 'Look, Congress has reset the playing field. The rules of the game have changed. Some of these practices that we know were harming consumers have to stop.' Now the ball goes back to the industry, and they have to decide how to evolve their product," said Nick Bourke, the manager of the Safe Credit Cards Project at the Pew Charitable Trusts.
The first phase of the law took effect last August. It required card issuers to provide 45 days' notice on interest rate hikes and that billing statements be mailed at least 21 days before their due dates in order for late fees to be applied.
The changes that will take effect Monday are much stronger. With the exception of cards that have variable interest rates, the new rules ban rate hikes on existing balances unless the cardholder is at least 60 days past due.
If delinquent cardholders pay on time for six straight months, the law requires that their higher penalty rates be lowered to their previous interest rates.
This will save cardholders at least $10 billion a year, according to Bourke. It's the most important change for consumers because it bans a number of punitive rate hikes on existing balances, including the infamous "universal default," in which a late payment on one account can trigger a rate increase on another one.
It's important to note, however, that lenders can still impose universal defaults and other penalty rate increases on new purchases. The CARD Act exempts only existing balances from such increases.
The new rules also require that card payments above the minimum monthly amounts go toward balances with the highest interest rates. Consent from cardholders also is required before fees can be assessed on transactions that exceed cards' credit limits. The law doesn't affect fees for late payments, however.
The new law prohibits a practice called "double-cycle billing," using the current and previous months' balances to determine the finance charge. For people with prepaid credit cards, typically those with poor credit histories, the law also limits fees in the first year to no more than 25 percent of the starting credit limit.
Most cardholders already have seen the effects of the new law in their February statements, which now are required to show how much it will cost and how long it will take to pay off balances by making only the minimum monthly payments, as opposed to paying them off in three years. Statements also must provide contact information for credit counseling services.
The final rules of the CARD Act will take effect on Aug. 22. They include a requirement that penalty fees be "reasonable and proportional" to violations of credit cards' terms.
Another August provision requires that all interest rate increases since January 2009 be reviewed to determine whether the "relevant circumstances" that prompted the increase have changed. If so, the issuer must consider lowering the rate.
The Federal Reserve will determine what's "reasonable and proportional," what constitutes "relevant circumstances" and what must be considered when deciding whether to lower interest rates, Bourke said.
All the new rules are a major victory for consumers, who've long complained about unfair and deceptive credit card tactics but felt powerless to fight back.
"These are the most important consumer-friendly set of rules to come out in the last 20 years. It's a game changer," said Josh Frank, a senior researcher at the Center for Responsible Lending in Durham, N.C.
With nine months to prepare for the new law, lenders instituted a number of changes to beat Monday's deadline. Most raised interest rates, tightened credit standards, lowered credit limits and raised or imposed more fees for things such as account inactivity and transactions that involve foreign currency.
More cards also are imposing annual fees, increasing balance-transfer fees, moving from fixed interest rates to variable rates and cutting rewards and bonus offerings.
The changes come as the card industry suffers through one of its worst slumps and cash-strapped consumers try to break their credit addiction.
Some have no choice. Cardholders who've lost their jobs or who face other financial crises are simply walking away from their card debt. These defaults or "charge-offs" reached record levels last year, said Meghan Neenan, the senior director of the financial institutions group at Fitch Ratings.
"Even with the profitable banks, like JPMorgan Chase, their credit card units are billions of dollars in the red. And it gets worse from there when you talk about Citi and Bank of America, They really lost their shirts," said Ben Woolsey, the director of consumer research at CreditCards.com, an online marketplace for credit cards.
Twenty-nine percent of the people polled earlier this month by CreditCards.com said they didn't have credit cards, compared with 19 percent in a similar poll last June, Woolsey said.
Those who do have cards are trimming their debt. Federal Reserve figures show that outstanding card debt fell 9.5 percent from 2008 to 2009, from $957.3 billion to $866 billion. For each household with credit card debt, that's a decline of nearly $1,700, according to CreditCards.com.
As the nation crawls out of the recession, lenders haven't given up on card-weary borrowers. Nearly 399 million credit card offers were mailed to U.S. households in the fourth quarter of last year, up 46 percent from the third quarter.
Before long, clever new strategies to increase card profits probably will emerge, prompting more calls for regulatory action. Establishing a Consumer Financial Protection Agency would resolve the problem once and for all, said Frank of the Center for Responsible Lending.
"But for a while, this law will hold 'em in check," he said.
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