Just because there are new rules for how banks raise interest rates on credit cards doesn't mean Bank of America and others won't still do so. Photo: MoneyBlogNewz/Flickr.com/CC-BY

Just because there are new rules for how banks can raise credit card interest rates does not mean banks will not raise them. Bank of America, for instance, has been reported as raising interest rates to 30 percent for missing a single payment. The increased regulation is making some differences, but may not be as effective as hoped.

CARD Act causes default interest rates to increase

The Credit Card Accountability Responsibility and Disclosure Act of 2009 had a noble aim, which was to make the way credit card companies dealt with their customers and the interest rates on the cards issued to them clearer. One practice in particular was that of default rates, according to Daily Finance. When a customer defaults on their credit card, the interest rate assessed on past and future balances is raised, even if payment is late by a day. In 2009, default rates averaged around 25 percent, but are currently averaging closer to 30 percent. Bank of America is already raising default rates to 29.99 percent on the future balances of customers who are late on payments.

Card issuers have been compliant

Default rates can no longer be charged on past balances unless the account is 60 days in default or more, and banks are complying with laws. However, that is small consolation to card carriers who rely on credit cards to help them cover unexpected expenses. Credit cards are a method for people who don’t have or want to use cash to avoid having to miss payments or resort to other types of short term loans in a pinch, but a 30 percent interest rate makes for a slim margin of error. One missed payment and a car holder won’t be able to afford to rely on their card as a source of credit anymore, which is a common reason for people turning to other lending options such as car title and payday loans. The Consumer Financial Protection Bureau is supposed to begin regulating consumer credit products in a few months, according to CNN, but legislative bickering over the agency may gut it before it opens its doors.

Overdraft fees continue

People are still paying overdraft fees and buying overdraft protection despite the programs having been a cause of customer dissatisfaction, according to USA Today. It is estimated that banks and credit unions will collect nearly $38.5 billion in overdraft fee revenue for 2011. Overdraft fees average about $35 per occurrence when a customer is enrolled in overdraft protection, which not every bank customer wants to. Simply having one’s debit card declined costs nothing, and a transfer of funds from savings to checking in case of an overdraft costs far less than using a line of credit related to overdraft protection.

Sources

Daily Finance

CNN

USA Today

The final new credit card rules enacted Aug. 22 aim to protect consumers from excessive late fees and unreasonable interest rate hikes. Thinkstock photo.

The final package of new credit card rules went into effect Sunday. The latest rules limit late payment fees and other penalties. This completes a major overhaul of the credit card industry that was set into motion by the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009. One of the newest federal laws cuts late payment fees to an average of $25. Over the past year as new credit card rules have been rolled out, credit card companies have been dramatically increasing interest rates. Another rule requires them to justify those increases to federal regulators.

New rules target late penalties and interest rate hikes

The newest credit card rules enacted Aug. 22 prohibit credit card companies from charging more than $25 for late payments, end the practice of charging customers for not using their cards, and order them to reconsider interest rate increases imposed starting from Jan, 1, 2009. CNN reports that credit card companies must cut interest rates if the reasons they claim for the increases no longer apply. Federal regulators will review those reasons and enforce compliance with the law. However, the new rules give banks wiggle room to hike penalty fees higher than $25 if a cardholder is habitually late with payments or if the credit card company can prove the high fee is justified to offset the  cost of late payments. Another new rule prohibits penalty fees from exceeding the minimum payment or the amount charged over the credit limit.

Credit card companies scheme to recoup lost billions

The latest round of new credit card rules could subtract $3 billion a year from credit card company bottom lines. The Wall Street Journal reports card companies have already been raising fees on balance transfers and cash advances, boosting charges for overseas transactions and charging higher annual fees. Because of the new rules, credit card companies are also expected to raise monthly minimum payments due, which would enable them to increase the late payment penalty fee. Banks accustomed to reaping huge profits from penalty fees aren’t letting go easily. A credit industry executive told the Journal that before the new credit card rules, credit card companies collected about $11.4 billion in late fees. That figure is expected to drop 29 percent to about $8.1 billion.

Credit card spending rises along with interest rates

While the new credit card rules have been giving consumers some protection from excessive late fees, credit card companies have been jacking up interest rates. Another CNN report said that in the second quarter card issuers raised interest rates on existing card holders to an average of 14.7 percent — up from 13.1 percent a year ago. The current spread between the average credit card interest rate and the prime rate is 11.45 percentage points — the widest it has been in 22 years, according to Synovate market research arm of Aegis Group. Synovate also said that credit card spending reached the second-highest level ever in the second quarter.

The Capital One class action lawsuit, revived on appeal, accuses the credit card company of deceptive lending and unfair competition. Flickr photo.

Raising credit card interest rates on customers without telling them has gotten Capital One in trouble, again. A class action lawsuit accusing Capital One of violating the Truth in Lending Act by raising credit card interest rates without warning was dismissed by a federal judge earlier. But the 9th Circuit reinstated the Capital one class action lawsuit July 22. New credit card rules enacted earlier this year make arbitrary interest rate increases illegal.

Capital One class action lawsuit

The Capital One class action lawsuit accuses the credit card company of unfair competition and deceptive lending for raising  credit card interest rates without giving consumers “clear and conspicuous” warnings. The Courthouse News Service reports that after having the credit card for three and a half years and complying with the terms of the contract, lead plaintiff Raquel Rubio claimed her credit card interest rate suddenly more than doubled.

Capital One reserves the right to deceive you

Rubio sued Capital One for breach of contract, violation of the Truth In Lending Act and unfair competition. A federal judge dismissed the class action, ruling that Capital One satisfies its obligation to be clear and truthful by stating that the rates and fees were subject to change. Capital One reserved the right to “amend or change any part of your Agreement, including periodic rates and other charges, or add or remove requirements … at any time.”

Capital One buries deception in fine print

The Capital One class action lawsuit was revived on appeal. A three-judge panel ruled that Capital One can’t represent that the rates are “fixed” if they are not. Reuters reports that Rubio had accepted a February 2004 mail solicitation from Capital One that offered a credit card with a 6.99 percent rate on balance transfers and purchases. The solicitation included a required table that said in 10-point type that the rate could rise if Rubio missed a payment, exceeded her credit limit or had a payment returned. But in eight-point type on the same page, it also said terms were “subject to change,” and a cardholder agreement that Rubio received the next month said Capital One could “amend or change any part” of her agreement “at any time.” Capital One raised Rubio’s rate in August 2007 to 15.99 percent though she had not triggered any of the conditions warranting a hike.

Knowledge about personal finance among Americans is increasing, but high credit card debt shows some hard lessons learned during the recession are being ignored. Flickr photo.

Americans are more educated about credit than they were before the recession, however, their knowledge about personal finance isn’t resulting in better decisions about credit and lending. A survey indicates that most Americans know the interest rates they are paying on their credit card and they know their credit rating. Even so, they continue to carry high interest credit card debt and many don’t know how to improve their credit scores.

Personal finance know-how no good

A survey of personal financial knowledge by Harris Interactive on behalf of Lending Club shows that Americans still aren’t making the most of hard-learned instant cash credit lessons learned during the recession. Adults unaware of their credit score came in at 31 percent, compared to 45 percent who didn’t have a clue in 2007 according to a Bankrate, Inc. survey. Fewer adults (22 percent) who use a credit card don’t know the interest rate on the credit card they use most often (compared to 29 percent who reported not knowing in 2007, according to a National Foundation for Credit Counseling survey).

Credit card debt prevails

Credit card companies will be glad to know that of those adults who do know the interest rates on their cards, the survey shows 31 percent have an interest rate of 20 percent or more and 64 percent pay 14 percent or more. Although 93 percent of credit card users know it’s possible to negotiate for a better rate, only 29 percent have ever tried to. Although closing a credit card account negatively impacts credit score, 18 percent erroneously believe it increases your credit score; 27 percent believed it has no impact. For those with debt other than a home mortgage, credit card debt is the most common type of debt overall (67 percent) and often the most expensive type of debt to carry.

Personal finance advice

To gain more knowledge about personal finance, AOL Money Coach Jennifer Openshaw has advice for consumers who want to be smarter when it comes to credit. If you aren’t aware of your card rates, find out. And once you do, take the initiative to ask for a lower rate. About 68 percent of those who ask for a lower rate are successful and build confidence in their financial savvy as well. Start with a target rate in mind, be assertive and ask for the supervisor if necessary.

Know what affects your credit score

Openshaw also suggests learning about what affects your credit score. Know that closing older accounts reduces your balance-to-credit card limit ratio, which may actually lower your score. If you have trouble controlling your credit card spending, it may be better to take the temporary hit to your score so you have fewer sources of temptation. Finally, cut your costs on current debt, consider paying off all your debts with one lower interest rate bank loan, but don’t do it on a credit card.

Flickr/MoneyBlogNewz/CC-BY

New credit card rules approved by the Federal Reserve on Tuesday are designed to protect consumers from interest rate hikes, heavy late fees and other penalties. Since the 2009 credit card law was passed last May, credit card companies have tried to stay a step ahead of the law with creative new fees and penalties. The new credit card rules announced Tuesday by the Fed go into effect Aug. 22. The provisions close some loopholes and complement rules in 2009 credit card law already in effect.

Credit card late fees cut

The new credit card rules are the finishing touches of the Federal Reserve’s effort to carry out the credit card legislation President Obama signed last year. Reducing credit card penalty fees was one of the principal goals of credit card legislation, but Congress charged the Fed to figure out how. CNNMoney.com reports that consumers will most immediately notice the new penalty fee limit of $25. There are some exceptions. If the payment is late a second time in a six month period, the credit card company can charge a $35 late fee. Until August 22. most credit card late fees are $39.

Credit card penalty fees limited

New credit card rules also limit penalty fees for exceeding credit limits. Forbes reports that the penalty fees cannot exceed the dollar amount of the consumer’s violation. For example, a credit card company can no longer charge a $39 fee when a customer exceeds his or her credit limit by $20. Now the fee cannot exceed $20. But that consumer could still face a permanent penalty hike on his interest rate on future purchases. Credit card companies can also no longer charge an inactivity fee on cardholders who don’t use their cards.

Credit card interest rates re-evaluated

New credit card rules also require issuers to review high credit card interest rate hikes inflicted on consumers since Jan. 2009 in the wake of a nationwide credit crunch.The New York Times reports that if your credit card company raised your interest rate after Jan. 1, 2009, it will have to re-evaluate its reasons for doing so and potentially lower the interest rate if it finds that those reasons no longer apply. The Fed hasn’t yet said how regulators will enforce this particular rule on credit card interest rates.

Need to know: new credit card rules

In a press release announcing the new credit card rules, the Fed said consumers can learn more about changes to their credit card accounts by accessing a new online publication, “What You Need to Know: New Credit Card Rules Effective Aug. 22.” It explains key changes consumers can expect from their credit card companies as a result of the third phase of the new credit card rules.