The core credit card regulations from the Credit Card Accountability Responsibility and Disclosure Act of 2009 went into effect Feb. 22, 2010. While the regulations are important consumer protections, there is still room for banks to profit off credit card holders, though it will not be as easy as in the past.
Key protections:
- Issuers generally must provide 45 days’ notice to increase interest rates.
- Interest rate hikes cannot apply to past balances unless the customer misses a payment by 60 days.
- Charges for exceeding the credit limit are only permitted if you opt in to over-the-limit fees beforehand. Otherwise, a charge that would exceed the limit will simply be declined.
- Issuers cannot raise rates because a customer failed to pay an unrelated creditor.
- Payments must be credited to the balance with the highest interest rate first.
- Issuers must disclose how payments affect your balance, including how long it will take to pay your balance making only minimum payments and the monthly payment required to pay your balance in three years.
Card companies can still:
- Raise rates on new purchases, as long as they give you 45 days’ notice.
- Take advantage of “promotional period” loopholes. Issuers can increase interest rates without 45 days’ notice, including rates on previous balances, if a promotional period has ended.
- Charge very high interest rates. There is no cap on the maximum interest rate allowed; there are only notification requirements.
To deal with the new regulations, banks are finding other, less-than-consumer-friendly ways to offset lost income. Since August 2009, banks have already begun using new tactics; many began to adjust even before the new rules went into effect. The Wall Street Journal reported card issuers stand to lose $12 billion per year from the new restrictions, so it’s logical to expect new and increased fees in other areas.
Likely new tactics:
- More widespread and significant annual fees
- Higher fees for international transactions
- Increased balance-transfer charges
- Higher interest rates from the outset
- More variable-rate rather than fixed-rate cards
Still, it appears competition will keep relatively attractive offers in place for customers with strong credit. It is already a bit harder to find cards with stellar rewards and no annual fees, but there are still decent cards available. Card providers are focused on making the largest profit possible, but they realize there is a point of diminishing returns when it comes to customers with the ability to pay off their balances–if fees are too steep, customers will switch providers or even change to a debit card. That said, consumers should expect to see fewer rewards.
The new regulations do help protect consumers from some of the financial industry’s most egregious past practices, but ultimately consumers must protect themselves by scrutinizing the fine print in their bill each month. Banks are looking for opportunities to charge consumers more money, just as they were before. The profit-seeking behavior that prompted these regulations has not shifted, and the basic, common-sense reality of credit cards remains. If you have good credit and pay your balance on time and in full each month, you can probably avoid most of the new fees, but you will likely see fewer rewards. If you carry a balance and have trouble paying on time, you will still end up paying an arm and leg in finance charges, and it remains very possible you could dig yourself into a credit hole.