Credit Card Companies “Exploit Loopholes?”

The Credit CARD Act of 2009 is due to come fully into force 10 weeks from today. But a report says that it’s likely to fail to prevent credit card companies from continuing to gouge their customers.

The report, which was released last Thursday, was published by the Center for Responsible Lending (CRL). And its title, Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate, says it all.

Credit Card Trends All-Too Familiar

The CRL identifies eight practices that it describes as “abusive tactics.” These are:

1. Pick-a-Rate–New formula for calculating some credit card rates sneakily increases them
2. Variable Rate Floors–Variable rates only vary upwards from the start rate
3. Minimum Finance Charges–You pay the minimum charge (up to $2), even if you owe only a penny
4. Rigged Late Fees–Highest late fees are applied to smaller balances so you pay more
5. Inactivity Fees–You pay up to $36 a year for the privilege of not using your card
6. International Transaction Fees–Going up, and sometimes applied even to dollar transactions
7. Balance Transfer/Cash Advance Fees–More prevalent, and more expensive
8. Balance Transfer/Cash Advance Fees Gain Floors and Lose Ceilings–So (you guessed it) you pay more

What’s Pick-a-Rate?

Pick-a-rate is a good example of a sneaky practice. Indeed, unless you read the small print in your credit card terms and conditions very carefully, you’re unlikely to realize that it may well be happening to you.

In the good old days, credit card rates were usually calculated on the basis of the prime rate that applied on the last day of the billing cycle. But the CRL says that more and more issuers have changed the rules so that they can now charge a rate based on the highest prime rate over a 90-day period. And the organization reckons that pick-a-rate is already costing Americans $720 million a year–an amount that could rise to $2.5 billion as the practice spreads.

Credit CARD Act Won’t Work?

Although the Credit Card Act will certainly stop some abuses, the CRL says that the legislation is powerless to prevent seven of the eight practices listed above. And its provisions don’t explicitly ban the eighth.

Josh Frank, the CRL researcher who wrote the report, commented:

The Credit CARD Act that Congress passed earlier this year was a big improvement for American families. But our research shows that industry keeps finding clever ways to get around meaningful reform, and we need a regulator focused on making financial products fair.

Plummeting Popularity Not a Consideration

In October, a Consumer Reports poll found that:

Credit card holders are angry. More than a one-third (32%) have paid off and closed a card since January 2008, and half of those that canceled did so in direct response to the actions of credit-card issuers, such as cutting limits, hiking rates, or imposing fees…

Twenty-one percent of respondents said they were treated unfairly by card companies, and only 41 percent said they were highly satisfied with their card issuer, making credit cards one of the lowest-rated services that Consumer Reports covers.

And that was back when most people expected that forthcoming credit card regulation would have some bite. Those numbers are likely to get worse, and worse, at least in the short to medium term.

A Glimmer of Hope?

Friday, the U.S. Congress passed the Wall Street Reform and Consumer Protection Act. And that could–depending on the Senate’s reaction to it–usher in a new wave of credit card regulation.

Although the bill doesn’t focus on credit card companies as such, it does contain provision for the creation of the Consumer Financial Protection Agency. And, if that watchdog is given teeth, it may just give those companies a run for their–and our–money.

Published 12/14/09 (Modified 04/23/12)