Here s a new example> of how credit-card issuers are finding creative ways to circumvent the soon-to-be enforced CARD Act. Some store cards are taking an unusual approach in calculating interest on new purchases. The result: finance charges that accumulate in a manner very similar to those made possible by so-called double-cycle billing.
Double-cycle billing computes interest charges based on the previous two billing cycles (as opposed to the last billing cycle alone). It effectively penalizes consumers who revolve balances only occasionally. (Read more about it here
Virtually all card issuers abandoned double-cycle billing over the past year, but if you have a Macy s or Bloomingdale s credit card, you are subjected to a practice that accomplishes a similar effect. Because these cards have no grace period, they begin charging interest on the date a purchase is made. Assuming you start a billing cycle with a $0 balance and then pay off your new balance in full, including any accrued initial interest charged, those interest charges are reimbursed on your next statement. If you make a partial payment, the bank keeps all interest charges to itself.
The approach, in effect since 2007, is notable today because it is another example of how credit cards are effectively skirting the new law by introducing new practices, now that some of the old ones are banned. This is a predictable response to the upending of the business model of card issuers that has been done through legislation in the past two years, says Rob Hammer, the chief executive officer of R.K. Hammer, a bank-card advisory firm.
Citibank, which issues the Macy s and Bloomingdale s cards, told us that the CARD Act prohibits issuers from charging interest on any part of a balance for a current or prior billing cycle where a grace period applies but does not apply to cards that have no grace period. Because the [Macy s or Bloomingdale s] account offers no grace period on purchases and calculates the interest charge based solely upon the balance in the current billing cycle, this does not violate the CARD Act s rules against double cycle billing, says Samuel Wang, a Citi spokesman.
The Office of the Comptroller of the Currency, which is in charge of enforcing the CARD Act, declined to comment on the Macy s or Bloomingdale s cards, but said they are monitoring practices to ensure issuers comply with the law.
Still, consumer advocates say the practice is equivalent to double-cycle billing, which the new law expressly prohibits.
The practice has two major implications for card holders. First, unless you pay off your balance in full every month, you risk being charged interest on payments you ve already made. For example, if you make a $400 payment on a $500 balance, you will still pay the interest charged on $500. Meanwhile, the unpaid balance will continue to accrue interest in the following month, so the bill received on month three will include interest charges on purchases made two months prior.
It looks to me that this is double-cycle billing in reverse, says Gerri Detweiler, a consumer credit adviser with Credit.com, an educational web site.
Industry analysts expect more banks to seek additional revenue by removing their grace periods. If the top five credit-card issuers in America were to do that, they would bring in around $75 billion to $80 billion in additional revenue, doubling what the banks received in 2009, Hammer says.
Lauren Saunders, managing attorney at the National Consumer Law Center, says consumer advocates have asked the Federal Reserve to tighten up its credit-card regulations so banks can t engage in such practices. One guy at the Fed said it s just a cultural problem at the banks, she says.