Clarifying Interest Rate Changes Allowed with the CARD Act
by Bill Hardekopf
The CARD Act is now in place and providing important protections for credit cardholders. Consumers are saving millions of dollars through some of these provisions, such as the elimination of over the limit fees and the restrictions on interest rate hikes during the first year of an account.
Credit card companies have had to find ways to make up for this lost revenue. Many issuers have increased balance transfer fees, cash advance rates and foreign transaction fees. There are now more cards with annual fees and most every fixed rate card has been changed to a variable rate card. But the change that affects the most consumers is the steady rise in interest rates.
Based on the 1000+ cards found in the LowCards.com Complete Credit Card Index, the average APR the week before the CARD Act was signed into law (May 2009) was 11.64%. As of last week, that average interest rate had increased over two percentage points to 13.70%.
A new study from Synovate confirms that issuers have increased rates on existing cards. According to their statistics, the average APR in the second quarter of 2010 increased to 14.7% from 13.1% a year ago. Synovate reports the average interest rate is at the highest level since 2001 despite the prime rate being at an historic low. There is now an 11.45 percentage point gap between the two rates, the largest in at least 22 years.
Higher interest payments are hard on consumers, but it will get even worse if the Federal Reserve starts to make changes that increase the prime rate. Nearly every credit card now has a variable rate and many of those cards have the prime rate as their base. Once the prime rate rises from its historic low, consumers will see a corresponding increase in the APR of those variable rate credit cards.
There seems to be some confusion among consumers on how the CARD Act can affect your credit card interest rates. Here is some information:
- The CARD Act does not cap interest rates. Issuers can still increase your interest rates. However, competition provides its own regulatory-type influence to help anchor down rates and keep them from soaring.
- Issuers have to give a 45-day notice for rate increases unless it is a variable rate card and the card's index (usually the prime rate or LIBOR rate) increases.
- If your credit card company does raise your interest rate, the new rate will apply only to new charges you make. If you have a balance, your old interest rate will apply to that balance.
- If your credit card's rate has been increased since January 1, 2009, the new rules require issuers to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate. Since the beginning of last year, millions of cardholders have seen their interest rates increase. Some issuers raised rates to as high as 29.99% for cardholders with good credit. Issuers must also perform a review every six months on accounts that receive a rate increase. The review should determine if changes in key factors (such as cardholder credit risk, payment history, and market conditions) give reasons to reduce the rate.
- If your payment is 60 days past due, the issuer can raise your APR to the penalty rate (30% for some cards). If you immediately make at least your minimum payment on-time for six straight months, then your issuer needs to reevaluate your account. However, if you make another late payment during that six month period, the higher rate could apply indefinitely to new transactions.
- Issuers can still apply your minimum payment to the balance with the lowest interest rate. Due to the CARD Act provisions that went into effect this past February, the remainder of the payment has to be applied to the balance with the highest interest rate.
- Issuers can't raise your rate during the first year of an account unless your payment is more than 60 days late, or unless it is a variable rate card and the card's index (usually the prime rate or LIBOR rate) increases.
Here are some tips for consumers regarding their card's interest rates:
- Shop around for a card with a low rate. Direct mail offers are increasing again. Don't necessarily apply for the first offer you receive. Compare your offer with others found on the Internet.
- Consider transferring your balance to a card with an 0% intro rate for twelve months and a lower ongoing rate. This could be beneficial if the amount of interest you save significantly outweighs the upfront balance transfer fee you will be charged. You need to do the mathematical calculations to determine if this is a financially prudent move for you.
- Pay down as much you can on the balance with the highest rate. Any amount above the minimum payment will be applied to the highest rate.
Paying off your credit card debt is the only way to be unaffected by rate increases. Higher interest rates drain away money that could be used to pay off your debt, extending the time it takes to eliminate the balance. If you have a few extra dollars, make smaller payments more often. Micropayments save on the interest you pay and will help you eliminate your debt more quickly.
Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates.
If you want to follow this post leave a comment bellow and continue the thread, or sbscribe the feed.
Subscribe via RSS
No comments yet.
Sorry, the comment form is closed at this time.