On Still Not Owning a Credit Card
Sunday marked the final phase of the Credit Card Accountability Responsibility and Disclosure Act of 2009 going into effect. This last stage has good news for consumers: lenders are banned from charging fees larger than the infraction — if you spend $20 over your max, you can’t pay more than $20 in a penalty fee. Issuers can no longer charge you for not using your card. And they can only charge once per each violation. In essence, this final phase is all about the fees.
Earlier phases reign in when and how credit card companies can jack up interest rates. Rates can’t be raised on a card in the first year of an account. Companies now have to give their customers 45 days’ warning before hiking up a rate, as well as a reason for raising it. They then must reevaluate the newly raised rate every six months, lowering it if the borrower has made six consecutive payments on time. (Although the vagueness of a reevaluation against factors such as market conditions and a consumers’ creditworthiness sound ripe for interpretation.)
The new rules have sent credit card lenders scrambling to protect profits — as good a sign as any that they’re likely to have a real effect on the companies they regulate. But the scramble also points to the ways the lenders plan to weasel around them. Before the CARD Act’s limits on interest rates hit, lenders quickly sent them soaring. The average interest rate on existing cards is far outpacing the prime rate, and rates are at their highest level in nine years. Says a Wall Street Journal article, “In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier, according to research firm Synovate, a unit of Aegis Group PLC. That was the highest level since 2001.”
The card companies claim that this move is not just to recoup any hit to profits from the legislation, but also because of “consumers still charging on their credit cards, but being unable to pay,” says Lauren Guenveur, the Synovate study director. But as Yves Smith points out, the number of credit card accounts has fallen by over 20% since their peak, and outstanding balances by 6%. Consumers are focusing on paying off debts (as well as being cut off from credit cards). There’s no doubt that defaulting consumers have a role to play here, of course. Over 750,000 consumers filed for bankruptcy through June 30 this year, up 15% for the same period in 2009 — on pace to reach the highest level since the new bankruptcy laws were put in place in 2005. Clearly many people in this recession are unable to pay their balances. But as I showed in my last piece on credit cards, bankruptcy isn’t what credit card companies fear — it’s just that they want to prolong the period before filing. They want nothing more than to have lots of customers who can’t pay off their balances.
And as Beverly Blair Harzog of CardRatings.com points out, there are still plenty of loopholes in this act. One helps to keep a consumer in the “sweat box“: while the act requires issuers to apply payments above the minimum to the higher balances first, they can still put the minimum payment toward balances with lower interest rates. So the higher rate balances don’t get the relief of your payment — the lower rate, less costly accounts do, leaving the others to rack up interest. Other loopholes: interest rates, while they can’t be hiked retroactively on old cards or within the first year of an account, can be raised “significantly” in all other circumstances as long as you get that 45 days-ahead notice. While you will now get a notification in the mail if your card has been discontinued, no one is sure just how much notification. Companies can’t raise an interest rate on one account because a consumer was late on an unrelated account, but Harzog says she sees some “suspicious” language lingering in cards’ Terms & Conditions.
Consumer advocates are counting the CARD Act as a big win, because with more explanation and warning of both fees and rate hikes, there is less room for borrowers to get suckered into traps. And more information will certainly mean a more level playing field. But as Moshe Orenbuch, a banking analyst at Credit Suisse, puts it, “What the industry is doing is taking that cost and spreading it over all customers, as opposed to a smaller number.” Interest rate hikes are likely to continue across the board as a response to this legislation. And as the above loopholes prove, there will be holes for the companies to wriggle through — even if those holes might be smaller than they were before.
Many of the rules in this act highlight practices I can’t even believe were once condoned — like charging someone for not using their card. While that has been abolished, other suspicious practices remain intact. Innovating in order to squeeze through loopholes and find new ways to make profits has come to define credit card company practices in recent years. Why would that change now? Even with the new rules, they’ll likely find ways to keep the sweat box full. I’m still skeptical, and I’m still staying away from credit cards as long as I can. Who’s with me?
Bryce Covert is Assistant Editor at New Deal 2.0.