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CREATIVE NEW FEES ESCAPE CARD ACT RULES 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 flooreven 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.
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