Before The Credit CARD Act, A Pound of Flesh

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The major provisions of the CARD Act took effect Monday and these regulations are very beneficial for credit cardholders. But it appears that issuers simply made changes before this date, creating new ways to generate revenue at the expense of their customers.

One of the most significant changes has been in interest rates. Since the CARD Act places some restrictions on future interest rate hikes, issuers simply took them before the February 22 implementation of the law. While the prime rate remains at its historic low of 3.25%, unchanged since December 2008, the average APR on a credit card increased almost two full percentage points from the time the CARD Act was signed into law until it took effect.

According to the LowCards Complete Credit Card Index, which tracks the APR on the 1000+ credit cards in the United States, the average advertised APR last week was 13.54%. On May 21, the day before the CARD Act was signed, that average was 11.64%

The rates on some of the nation’s most popular cards increased even more significantly during the past 18 months. In October 2008, the APR for Blue from American Express was as low as 8.99%. Today, the rate is as low as 17.24%. In October 2008, the rate for Citi Platinum Select was as low as 7.99%. Today, it is as low as 11.99%. Some cardholders, who are now perceived as higher risk by their issuer, have received rates as high as 29.99%.

While the CARD Act does provide needed restrictions against “any time, any reason” rate increases, it doesn’t provide “every time, every reason” protection for rate increases. Issuers can still raise rates on future purchases if they provide a 45-day notice. Cardholders can also expect rate increases in the near future as the Fed eases its foot off the interest rate brake.

Other changes that issuers implemented include:

1) Minimum Payment Increases
Before the CARD Act, most issuers first applied the monthly payments to the part of the balance with the lowest interest rates, assuring that the cardholder paid the highest rates as long as possible and thus, extending the time for repayment. The CARD Act forces issuers to apply any payment in excess of the minimum monthly payment to the highest interest rate.

“This provision could have been one of the best regulations for consumers who carried a balance, helping them pay down the most costly loans faster and saving money on interest payments. However, many issuers also increased the minimum payment from 2.5% of your balance to 5%, so that a greater percentage of the payment is still applied to your balance with the lowest interest rate,” says Bill Hardekopf, CEO of and author of The Credit Card Guidebook.

“While this may help consumers pay down their debt faster, they now have to pay even more to exceed the minimum payment and pay down the higher rate loans.”

2) Fees
Even the though the CARD Act has eliminated the dreaded “over the limit” fee, issuers have used the nine months between the bill passing and being instituted to raise numerous existing fees and institute new fees. Here are a few examples:

  • Some issuers have increased balance transfer and cash advance fees from 3% to 5% (Discover and Chase).
  • Issuers are adding annual fees. Bank of America added an annual fee that ranges from $29 to $99 to a limited group of cardholders. In April, Citi will begin charging a $60 annual fee on accounts that charge less than $2400 per year.
  • Several issuers broadened the definition of international transactions to apply the foreign transaction fee to more purchases.
  • Some cards now cancel your accumulated rewards after a late payment, but then offer the chance to buy them back with a reinstatement fee.
  • World Financial Network National Bank now charges some cardholders a $1 fee for paper statements. World Financial Network national Bank offers a wide range of store-branded cards for retailers.
  • Inactivity fees have had a limited introduction, but more issuers may add this fee as a way to make revenue on dormant and rarely-used accounts.

3) Fixed to Variable Rates
Fixed rates were once a popular feature in marketing credit cards. Consumers wanted a set low rate; issuers liked them especially at a time when the prime rate was dropping and remained low.

But after the passage of the CARD Act, most issuers switched from fixed to variable rates to give themselves the flexibility to raise rates in the future, as the prime rate increases.

“Regulations in the CARD Act make it harder for issuers to raise rates, which is good for consumers, but the side effect is that fixed rate cards have almost become extinct,” says Hardekopf. “By changing to variable rates, issuers can maintain their margins by passing along any future increases in the card’s index.”

4) Changes in rewards
Since issuers are trying to raise revenue and cut costs, rewards is an area where they have made subtle changes to reduce their cost.

  • American Express reduced the amount of cash earned on some cards from 1.5% to 1.25% on most purchases.
  • Chase created Ultimate Rewards, with less generous rewards, to replace its popular Chase Freedom card and encouraged Freedom users to convert to Ultimate Rewards.
  • Citi tied bonus miles to purchases. Cardholders now receive 25,000 bonus miles after making $750 in purchases within four months.
  • The spend hurdle to earn 6,000 bonus points increased from $50 to $250 for both the Citi Forward Card and Citi Forward Card for College Students.
  • Discover reduced rewards for Open Road. 5% cash back on gas and auto maintenance became 2% cash back on gas and restaurants. However, the monthly cashback limit increased from $100 to $250 per month.

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