New report highlights ways issuers have gotten around new law
By Tamara E. Holmes
While the Credit CARD Act of 2009 puts an end to abusive tactics card issuers have long used to boost their profits, consumers need only to look at their card statements to know there's no reason to celebrate.
In the past year, card issuers have rolled out or expanded their use of other ways to collect millions more in fees each year, many of which are hidden to consumers, according to the Durham, N.C.-based Center for Responsible Lending's Dec. 10 report, "Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate."
"Credit card issuers are going to more than ever try to find ways to make extra profits," says Joshua M. Frank, a senior researcher with the Center and author of the report. New charges and changes to the way fees are calculated are adding to the balances of a growing number of cardholders. While some of the practices were instituted after the Credit CARD Act was approved in May, others were quietly being put in place earlier as a result of the recession. The one thing they have in common, says Frank, is that "none of them are explicitly prohibited by the Credit CARD Act."
Hidden rate changes
Consumers with fixed rate credit cards won't have to worry about interest rate changes to current balances if they pay on time, under the Credit CARD Act. The vast majority of cardholders, however, carry variable rate cards, in which the interest rate is determined by adding a fixed percentage to the rate of an index such as the prime rate. For them, things get a little murkier. In the past, issuers would generally use the highest prime rate in a cardholder's current billing cycle as the starting point for determining a credit card's rate for the month. However, a number of issuers have amended their terms this year so that they now can select the highest prime rate in the previous 90-day cycle, a move that costs consumers $720 million a year, the Center for Responsible Lending estimates. As a result, the interest rate paid by cardholders may not go down in a given month even if the prime rate goes down. "It's so hidden and obscure that it can't be interpreted as anything other than a way to extract money from people in ways they don't understand," says Frank.
Variable rate cardholders are also impacted by another pricing strategy, as many issuers have begun setting "floors" -- limits to how low a cardholder's variable rate can go. While the rate will rise with the prime rate, it won't go any lower than the floor even if the prime rate goes beneath that point. As of December 2009, the prime rate is at the historically low level of 3.25 percent. But "if you get a card in the future and the prime rate is, say 6 percent, then you wouldn't get the benefits of a decrease in the rate that would likely occur," Frank says.
New and expanded fees
Changes to interest rate calculations aren't the only ways issuers are mounting charges on consumers. A number of fees have become more prevalent this year, according to the center's study.
- Minimum finance charges can be greater than the amount of interest owed. As a result, if a consumer owes only $0.50 in interest, he may have to pay $2 because that's the minimum interest fee.
- Card issuers charge late fees that vary according to the card balance, so those who owe the most pay the highest fees. "But right now almost nine out of 10 people are in the top late fee category," says Frank. Though issuers often tout the lowest late fees, "the average fee that people pay has gotten higher and higher."
- Cardholders who don't incur regular charges risk being hit with inactivity fees. This strategy is even applied to cardholders who've opted out of a change of terms to the account and can no longer charge new items. Although their inactivity is forced, they may end up paying an additional $36 per year.
- Foreign transaction fees, which cardholders pay when a currency exchange takes place, are nothing new. But this year, more card issuers redefined "foreign" more broadly to include any transaction that at any point touched a foreign bank, even if the exchange took place in U.S. dollars. Likewise, the fee has inched upward with a majority of issuers charging 3 percent in 2009, compared with 2 percent in 2004.
- Card issuers are also cashing in on cardholders' use of balance transfer offers and cash advances. Not only are the fees for these transactions rising, but many card issuers are implementing minimum charges and removing caps they once had in place to keep the costs from surpassing a certain level. For example, a card issuer may implement a 4 percent transaction fee on cash advances with a $20 minimum. If a cardholder borrows $100, the 4 percent transaction fee would be $4. However, because of the minimum rule, the cardholder would pay an additional $16.
An exercise of choice
Consumers have more control over some charges than others, such as the ability to use a card to avoid an inactivity fee, but they need to keep a close eye on credit card statements. "We are seeing a lot of changes in the agreements so it's something for people to be really aware of in the next three to six months," says Sarah Fouquart, a group manager with Troy, Mich.-based GreenPath Debt Solutions. Those who don't understand the changes should ask their issuers about them, Fouquart adds.
While many of the top credit card issuers are embracing these new fees, consumers might also look to smaller regional banks or credit unions to avoid paying some of these additional costs, suggests Frank. "Usually you'll find that these organizations care more about the relationship with the customer than making a quick profit on one product," Frank says.
New fees and charges are unlikely to disappear anytime soon, but consumers still have options. "There's no harm in shopping around a little bit," says Fouquart.