Credit-Card Traps You Still Need to Watch For

PRESIDENT Obama signed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 Friday afternoon, marking a major milestone in consumers’ love-hate relationship with credit cards. But while it's being touted as a big win for cardholders, the new legislation hardly means they can start swiping that plastic worry-free. (For more on consumer protections in the new law, read “New Credit-Card Law: What It Means for You.”)

In fact, as the new rules go into effect in nine months (though some will kick in as soon as 90 days) and banks start curtailing the abusive practices this legislation reins in, other practices will likely emerge that can hurt consumers just as badly. “The pendulum may have swung in the wrong direction”, says Dennis Moroney, research director and senior analyst for TowerGroup, a research and advisory-services firm focused exclusively on the financial-services industry. “The banks now have to respond to these changes.”

You may not like that response. Whether you use your credit cards as a tool to rack up free rewards points or you carry debt that you’re hoping to repay one day, you should watch out for new fees, higher interest rates, less generous rewards and fewer promotional offers. Here’s what you need to know.

The new law prohibits over-limit fees (unless the cardholder agrees to allow transactions that exceed their limits). To make up for that lost revenue, banks will likely introduce other fees. “You will see a re-emergence of fees for all kinds of other services,” says Robert McKinley, founder of CardWeb.com, which provides industry research and analysis. Among the fees cardholders should watch out for: fees for rewards programs and possibly even fees for checking your balance, he says.

Also, expect annual fees to make a comeback, says Moroney. In the 1980s, annual fees were standard, but were dropped as competition among card issuers heated up. Moroney predicts that some issuers will slap annual fees on all their credit cards, while others will tie the fee to spending thresholds, so that only big spenders get a free ride.

What cardholders should do: To protect against unpleasant surprises, examine credit-card statements and change-in-terms letters carefully. For now, card issuers can change terms at any time with 15 days’ notice, but once the new law is in effect, they will have to give 45 days’ notice.

Universal default allows card issuers to hike rates if a cardholder's credit score drops or if they make late payments on other accounts. Once the new legislation is in place, issuers will lose this powerful risk-management tool. Without the ability to hike rates if a cardholder's perceived risk level rises, card issuers will just start charging higher rates across the board, says Moroney.

“We’re going back to the kind of marketplace we had in the 1980s,” McKinley says. “You’ll see interest rates go back to the 19% to 20% range for most people.” The average variable-rate credit card today charges a 10.79% APR, according to Bankrate.com.

What cardholders should do: To avoid higher interest charges, consumers who carry a balance will have to shop around for lower rates -- perhaps in exchange for paying an annual fee, says Linda Sherry, a spokeswoman for Consumer Action, a nonprofit education and advocacy organization. Those who pay their balances in full each month shouldn't be affected, she says. To compare credit-card interest rates on new-card offers, use sites like CreditCards.com, CardRatings.com or CardTrak.com.

The new legislation requires card companies to give consumers at least 21 days to pay their bills. But it doesn't require them to offer a grace period, which isn't the same as the cardholder’s due date — though the two usually coincide, says Chi Chi Wu, staff attorney with the National Consumer Law Center. While the due date designates the day by which a payment must be received for the cardholder to avoid a late-payment fee, the grace period is the time during which the cardholder isn’t charged interest.

McKinley says card issuers may get rid of grace periods altogether, so that cardholders who pay their balances off each month will start paying interest immediately after making a purchase. “The industry has for many years wanted to get rid of the grace period on convenience users,” he says.

What consumers should do: The only way to avoid interest charges if this happens is to stop using credit cards altogether, says Wu.

Low or 0% introductory APR offers have been a boon to diligent card users who played the balance-transfer game. Banks were able to offer those deals thanks to the card users who made a late payment before the offer expired, triggering the bank’s penalty rate of 20% or more. Now that banks won’t be allowed to increase interest rates on existing balances — and all promotional offers have to last for at least six months — these promotions will likely disappear, McKinley says. At best, consumers with excellent credit may receive introductory rates in the 6% range.

What cardholders should do: If you have a low-APR offer right now, be on your best behavior: Send payments on time and don’t do anything to trigger a penalty rate such as exceeding your credit limit.

Credit-card companies have already been scaling back on rewards programs. Once the new legislation kicks in and they feel the squeeze of lower revenue from penalty fees and interest charges, they’ll become even less generous. Spending thresholds will likely go up, Moroney says, so you'll have to spend more to earn miles, points or cash back. Banks may also adopt more stringent rules, such as wiping out your rewards balance if you make a late payment.

What cardholders should do: If you’ve accumulated a sizable amount of miles, points or cash back and worry that your card may scale back its program, it may be smart to redeem your rewards now — while the free lunch is still available.