Now that the> new credit-card law is in effect, what s in store for your plastic?
You probably already know to expect somewhat better disclosures and fairer treatment from card issuers. Monthly statements now have to clearly state how long it will take you to pay off your current balance if you only make the required minimum payments. Over-limit fees are forbidden unless you opt in and interest-rate hikes are somewhat restricted.
If you still don t know what has changed, take a look at our CARD Act outline. And if you notice that a card issuer is not complying, be sure to report it to regulators. Our story, Holding Your Bank to the New Credit-Card Law
But the new law will cost card issuers billions of dollars in lost revenue. Robert Hammer, the chief executive officer of bank-advisory firm R.K. Hammer, estimates that over the next five years issuers will lose just under $50 billion in revenue, most of it interest income. (That s roughly $5.5 billion this year and $11 billion a year starting in 2011, the first full year in which the new rules will be in place.)
The banks are already looking for ways to make up for those losses elsewhere. It s simply an issue of passing the buck, says Adam Levitt, a partner at the Chicago office of Wolf Haldenstein Adler Freeman & Herz LLC. The new legislation does go somewhere down the road to protect people from abuses, but it doesn t go far enough.
How do you make sure you re not the one footing the bill? Here are four CARD Act loopholes that card issuers may try to exploit going forward and how you can limit your exposure.
1. New fees
The new law may restrict issuers ability to raise rates, but nothing prevents them from imposing new fees. And they re wasting no time doing just that.
Earlier this month, Citigroup notified an undisclosed number of card holders that, effective April 1, they will be charged a $60 annual fee. In an innovative twist, the fee will be refunded to anyone who charges $2,400 or more a year. In a statement, Citibank said that customers can have the fee credited back by using their cards for the purchases they may already make on a regular basis.
Thinking about closing a card because of new fees? That may temporarily hurt your credit score. For more details, read our story Credit to Debit: Should You Make the Switch?
And issuers will hardly stop there, says credit expert John Ulzheimer, president for educational services at Credit.com. I think we ll see a CARD Act compliance fee. How is that any different from a service or inactivity fee? If cell phone companies and airlines can get away with compliance charges, Ulzheimer says, why shouldn t you expect one to pop up on your statements any time soon?
Under the new law, issuers are required to send you notification of any changes to your account terms (new fees, higher interest rates) at least 45 days in advance. That s an improvement over the 15-day notice they had to give under the old rules, but does it really do consumers any good? They know most consumers don t read that stuff, Ulzheimer says. Mail the notice in an inconspicuous envelope or bundle it with the monthly statement, and chances are even higher that the notice will remain unnoticed.
3. Interchange fees
The fact that the CARD Act did not address interchange fees the charges that processors Visa and MasterCard withhold from merchants any time someone pays with a credit or debit card has small business owners worried. These fees have already been rising steadily over the past years. Visa s fees rose from between 1.25% and 1.91% in 1991 to between 0.95% and 2.95% in 2009 for Visa and MasterCard s jumped from between 1.30% and 2.08% to between 0.90% and 3.25% during the same period, according to a recent report by the Government Accountability Office.
Read more about how small-business owners are coping with interchange fees
4. The under-21 loophole
Banks are no longer allowed to issue credit cards to anyone under the age of 21 unless a parent co-signs the account. I can see credit-card issuers at the end of the day liking this particular provision, Ulzheimer says. Now you don t have an 18-year-old who may or may not pay their bill. You have a parent on the hook, and the parent has a lot more to lose.
The bottom line: Whenever you cosign a credit card you are responsible for any unpaid balances and should the kiddo forget to pay their bill, your credit score will suffer just as much as theirs. You don t have to equip your college kid with a credit card right away. A debit card linked to a checking account will help them learn budgeting and to help them start building a credit history, you could make them an authorized user for any of your cards without giving them a copy. For more advice on using debit cards and other payment methods for people with low or no credit, read our story Three Cards for the Credit-Impaired.