Photo (cc) by See-ming Lee 李思明 SML
This post comes from partner site LowCards.com.
Despite legislation to make credit card terms fair and easy-to-understand for consumers, the new regulations have opened the door to changes that can make cardholders “vulnerable and uninformed.”
The Pew Health Group study (entitled “Two Steps Forward: After the Card Act, Credit Cards are Safer and More Transparent–But Challenges Remain”) released last week analyzed and compared the credit card marketplace before and after the CARD Act. The study reviewed credit cards offered online by the twelve largest banks and twelve largest credit unions–nearly 450 credit card offers.
The study shows that issuers have taken two steps forward in most areas, but also taken a step back with penalty rates. Some issuers no longer provide full disclosure of the terms of the penalty rate, or fail to correctly follow disclosure requirements required by the new Federal Reserve rules.
Before the CARD Act, credit card issuers clearly disclosed the penalty rate and the terms in the application process because this gave them the legal right to raise rates immediately and without notice as soon as accounts became past due or cardholders went over their credit limit. This full disclosure was in their best interest because increasing interest rates generated more revenue.
After the CARD Act, the Federal Reserve added new rules for the penalty rate. While these rules benefit cardholders, they have also allowed issuers to withhold important pricing information which can leave cardholders uninformed about the complete conditions of their credit card.
Here are the new rules for applying penalty rates:
- Issuers are permitted to apply an increased rate to an existing balance when an account becomes more than 60 days delinquent. Issuers can also increase rates to the penalty rate on new transactions any time after the account has been open for one year.
- The cardholder must be given at least a 45-day notice before the rate is increased.
- According to the Federal Reserve Board rules, “the credit card issuers must disclose if the rate increase is due to the consumer’s failure to make a minimum periodic payment within 60 days from the due date for that payment. In those circumstances, the notice must state the reason for the increase and disclose that the increase will cease to apply if the creditor receives six consecutive required minimum periodic payments on or before the payment due date, beginning with the first payment due following the effective date of the increase.”
- These rules also say that “the notice also must state the circumstances under which the increased rate will cease to apply to the consumer’s account or, if applicable, that the increased rate will remain in effect for a potentially indefinite time period. In addition, the notice must include a statement indicating to which balances the delinquency or default rate or penalty rate will be applied, and, if applicable, a description of any balances to which the current rate will continue to apply as of the effective date of the rate increase, unless a consumer fails to make a minimum periodic payment within 60 days from the due date for that payment.”
- Starting on August 22, 2010, issuers must perform a review of accounts that receive a rate increase. The review should determine if changes in key factors (such as cardholder credit risk and market conditions) give reasons to reduce the rate.
“The cardholder must make six on-time monthly payments that start at the time of the penalty, or the issuer can charge the penalty rate indefinitely,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.
The application of these rules varies widely by credit card company. Here is the terminology used by the six major issuers when describing this penalty rate:
Chase–If an APR is increased for any of these reasons (late payment, exceed credit limit, payment returned) the Penalty APR will apply indefinitely to future transactions. If we do not receive any Minimum Payment within 60 days of the date and time due, the Penalty APR will apply to all outstanding balances and future transactions on your Account; but if we receive six consecutive Minimum Payments when due, beginning immediately after the increase, the Penalty APR will stop being applied to transactions that occurred prior to or within 14 days after we provided you notice about the APR increase. (Penalty APR is 29.99%)
American Express–If the Penalty APR is applied for any of these reasons (late payments, returned payments), it will apply for at least 12 billing periods in a row. It will continue to apply until after you have made timely payments, with no returned payments, for 12 billing periods in a row. (Penalty APR is 27.24%)
Citi–If your APR is increased for either of these reasons (late payment, returned payment), the Penalty APR will no longer apply to existing balances on your account if you make the next six consecutive minimum payments when due. However, the Penalty APR may apply to new transactions indefinitely. (Penalty APR is up to 29.99%)
Discover— If your APRs for new transactions are increased for a late payment, the Penalty APRs may apply indefinitely.
(Editor’s Note: Discover seems to have the most reasonable penalty rate; it is five percentage points above the non-penalty rate. The Penalty APR is between 16.99% and 25.99% based on your creditworthiness and other factors.)
Capital One–If APRs are increased for a payment that is more than 60 days late, the Penalty APR will apply indefinitely unless you make the next six consecutive minimum payments on time following the rate increase. (Penalty APR is 29.4%)
Bank of America–If this account becomes 60 days or more past due, we may amend the terms of the Agreement to increase all interest rates, including interest rates on existing promotional rate balances.
According to the Pew report, altogether one in five penalty disclosures mentioned the right way to “cure” (return to the original, non-penalty interest rate). Only three of ten banks that use penalty rates mentioned the legally mandated cure periods.
The Pew report points out that some issuers (Bank of America) no longer provide the rate or terms for the penalty fee, only including a sentence in the fine print that states they reserve the right to impose a penalty fee.
The report argues that this undermines regulations. Cardholders are entitled to know the pricing of their account, the penalty rates that could apply, and how high those rates could be.
The Pew Health Group recommends that the Federal Reserve bank regulators should ensure full and reliable disclosure of credit card penalty rates because “full disclosure is critical to the success of this policy.”
Regulators should also enforce the existing rules in Regulation Z to make sure the penalty rate and the terms are disclosed in advanced.
It also suggests that the penalty rate should be no higher than 7% of the regular rate.