Significant APR Increases Took Place Before CARD Act

The major provisions of the CARD Act took effect Monday and these regulations are very beneficial for credit cardholders. But it appears that issuers simply made changes before this date, creating new ways to generate revenue at the expense of their customers.

One of the most significant changes has been in interest rates. Since the CARD Act places some restrictions on future interest rate hikes, issuers simply took them before the February 22 implementation of the law. While the prime rate remains at its historic low of 3.25%, unchanged since December 2008, the average APR on a credit card increased almost two full percentage points from the time the CARD Act was signed into law until it took effect.

According to the LowCards Complete Credit Card Index, which tracks the APR on the 1000+ credit cards in the US (http://www.lowcards.com/CreditCardIndex.aspx ), the average advertised APR last week was 13.54%. On May 21, the day before the CARD Act was signed, that average was 11.64%

The rates on some of the nation's most popular cards increased even more significantly during the past 18 months. In October 2008, the APR for Blue from American Express was as low as 8.99%. Today, the rate is as low as 15.24%. In October 2008, the rate for Citi Platinum Select was as low as 7.99%. Today, it is as low as 11.99%. Some cardholders, who are now perceived as higher risk by their issuer, have received rates as high as 29.99%.

While the CARD Act does provide needed restrictions against "any time, any reason" rate increases, it doesn't provide "every time, every reason" protection for rate increases. Issuers can still raise rates on future purchases if they provide a 45-day notice. Cardholders can also expect rate increases in the near future as the Fed eases its foot off the interest rate brake.

Other changes that issuers implemented include:

1) Minimum Payment Increases
Before the CARD Act, most issuers first applied the monthly payments to the part of the balance with the lowest interest rates, assuring that the cardholder paid the highest rates as long as possible and thus, extending the time for repayment. The CARD Act forces issuers to apply any payment in excess of the minimum monthly payment to the highest interest rate.

"This provision could have been one of the best regulations for consumers who carried a balance, helping them pay down the most costly loans faster and saving money on interest payments. However, many issuers also increased the minimum payment from 2.5% of your balance to 5%, so that a greater percentage of the payment is still applied to your balance with the lowest interest rate," says Bill Hardekopf, CEO of
LowCards.com and author of The Credit Card Guidebook. "While this may help consumers pay down their debt faster, they now have to pay even more to exceed the minimum payment and pay down the higher rate loans."


2) Fees
Even the though the CARD Act has eliminated the dreaded "over the limit" fee, issuers have used the nine months between the bill passing and being instituted to raise numerous existing fees and institute new fees. Here are a few examples:

* Some issuers have increased balance transfer and cash advance fees from 3% to 5% (Discover and Chase).

* Issuers are adding annual fees. Bank of America added an annual fee that ranges from $29 to $99 to a limited group of cardholders. In April, Citi will begin charging a $60 annual fee on accounts that charge less than $2400 per year.

* Several issuers broadened the definition of international transactions to apply the foreign transaction fee to more purchases.

* Some cards now cancel your accumulated rewards after a late payment, but
then offer the chance to buy them back with a reinstatement fee.

* World Financial Network National Bank now charges some cardholders a $1 fee for paper statements. World Financial Network national Bank offers a wide range of store-branded cards for retailers.

* Inactivity fees have had a limited introduction, but more issuers may add this fee as a way to make revenue on dormant and rarely-used accounts.


3) Fixed to Variable Rates
Fixed rates were once a popular feature in marketing credit cards. Consumers wanted a set low rate; issuers liked them especially at a time when the prime rate was dropping and remained low.

But after the passage of the CARD Act, most issuers switched from fixed to variable rates to give themselves the flexibility to raise rates in the future, as the prime rate increases.

"Regulations in the CARD Act make it harder for issuers to raise rates, which is good for consumers, but the side effect is that fixed rate cards have almost become extinct," says Hardekopf. "By changing to variable rates, issuers can maintain their margins by passing along any future increases in the card's index."


4) Changes in rewards
Since issuers are trying to raise revenue and cut costs, rewards is an area where they have made subtle changes to reduce their cost.

* American Express reduced the amount of cash earned on some cards from 1.5% to 1.25% on most purchases.

* Citi tied bonus miles to purchases. Cardholders now receive 25,000 bonus
miles after making $750 in purchases within four months.

* The spend hurdle to earn 6,000 bonus points increased from $50 to $250 for both the Citi Forward Card and Citi Forward Card for College Students.

* Discover reduced rewards for Open Road. 5% cash back on gas and auto maintenance became 2% cash back on gas and restaurants. However, the monthly cashback limit increased from $100 to $250 per month.

Citi Adds $60 Annual Fee to More Credit Card Accounts

One week before the CARD Act goes into effect, Citi has added an annual fee to more accounts on many of its popular credit cards.

Many Citi cardholders are receiving letters about a $60 annual fee that is being added to their account effective April 1, 2010. If consumers make $2,400 in purchases during the year, then the annual fee will be credited back to their account.

It appears that Citi's test of adding an annual fee to a small percentage of their customers in August of 2009 proved successful for the issuer. At that time, Citi began charging some cardholders an annual fee of $30 to $90 unless they spent at least $2,400 per year. Now a far greater number of customers are receiving this notice.

"The reason we are making this change is to maintain the quality of our service amid the rising cost of doing business," said Ken Stork of Citibank in a letter to the cardholders receiving this notice.

"This is a very concerning sign for credit card consumers and it is further evidence of how issuers will react in 2010. Issuers are having to find creative ways to generate revenue. The tough economy, the high default rates they have experienced, and the enactment of the CARD Act have combined to make it a very stressful period for the issuers," says Bill Hardekopf, CEO of LowCards.com and author of The Credit
Card Guidebook. "Adding annual fees is one way to generate new revenue. Consumers need to watch for this on their accounts since only about 20% of the credit cards currently carry an annual fee.

"If you spend at least an average of $200 per month on your Citi card, this may not be a big deal. However, it is a problem for the cardholders who charge less than $2,400 per year, who keep the account open for emergencies or to boost their credit score. Other credit card issuers may follow Citi and add a similar fee.

"If the annual fee will be added to your account, contact the issuer to ask them to waive it. This may not work, but it doesn't hurt to ask. You can opt out of the card and close the account. If you have a good history with this card and it is building your credit score, shift some of your spending to this card to reach the $2,400 limit and pay it off each month."

The Unintended Consequences of the CARD Act

On Monday, the major provisions of the Credit CARD Act take effect, nine months after they were signed into law.

Many of these provisions will have a very positive effect on consumers, but the law has resulted in some unexpected fallout.

"The CARD Act has some very significant benefits for credit cardholders. The restrictions on interest rate hikes and the ban on over-the-limit fees are tremendous. Consumers have cried out for these protections for years and they are finally about to take effect," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "However, there are a number of unintended consequences that have resulted from the CARD Act. These changes might affect more credit card consumers than the law helped."

Here is a look at some of the unintended consequences of the CARD Act:

* Since issuers will be unable to raise interest rates on new accounts for twelve months, they simply raised the advertised APR before February 22 so it affected everyone shopping for a new credit card account. According to the LowCards.com Complete Credit Card Index ( http://www.lowcards.com/CreditCardIndex.aspx ), the advertised Annual Percentage Rates for credit cards averaged 13.46% last week. Six months ago, the average was 12.11%. One year ago, the average was 11.51%.

* People under 21 will find it harder to build up their credit score. If they do not have a job with enough income, they must get an adult to co-sign. Many young adults will not take this extra step, losing out on the opportunity to build up a good credit history throughout college. Without a positive credit history, they may not receive as good an interest rate on their first house or car loan.

* Fees, fees and more fees. Issuers are introducing more cards with annual fees, increasing existing fees, and putting new fees on accounts. Last October, Bank of America notified a small percentage of their customers that it is adding an annual fee of $29 to $99 on their accounts beginning in February. Balance transfer fees, which have been at 3% for most issuers, have now been increased to 5% by Chase and Discover. Fifth Third Bancorp recently added a $19 inactivity fee if your card is unused for a twelve month period.

* The scarcity of fixed rate credit cards. Most issuers switched their fixed rate cards to variable rates, since the CARD Act allows APR increases in variable rate cards if the index used to on calculate that variable rate increases. As an example, if the index for a variable rate card is tied to the prime rate and the prime rate increases by 1%, the APR on that card can increase 1%. Many issuers switched their fixed rate cards to variable rate cards so they could maintain their margins once the CARD Act was instituted.

* Since any amount above the minimum monthly payment goes toward the balance with the highest APR, some issuers raised the minimum payment up to 5% on a number of accounts.

* A decrease in the amount of credit card rewards or cash rebates. Reduced rewards could come in several different forms: (1) a cutback in the payouts of cash back cards; (2) more miles or points needed for that free airline trip or hotel stay; or (3) higher tiers required for consumers to receive the same level of rewards.

* A decrease in the number of credit cards awarded by retail stores. Providing proof of income when applying for a credit card will make it significantly harder for consumers to instantly qualify for a credit card. This will certainly impact the marketing efforts of the 10-15% discount on a purchase if you sign up for a store's credit card. Retailers rely on this marketing strategy to increase purchases and to build their mailing list of customers used for offering future coupons or early-bird discounts.

The Other Provisions of the Credit CARD Act

Thanks to the Credit CARD Act, visitors to national parks can carry licensed firearms beginning on February 22.

It is hard to believe that this unique provision was added to the revolutionary credit card bill passed by members of Congress last May. Most of the attention from the bill has been given to the restrictions on interest rate increases and over the limit fees. However, there are many other lesser-known regulations in the Act that could have far-reaching ramifications for consumers.

Here is a look at some of those other provisions that take effect on February 22:

* Young adults who are under 21 will have a harder time building up their credit history. If they do not have a job with enough income, they must get an adult to co-sign. Fewer students will have credit cards and this will represent a major shift in spending patterns among young adults. According to a recent Sallie Mae study, 84% of college students have a credit card and 92 percent of undergraduate credit cardholders charge textbooks, school supplies, or other direct education expenses.

* The CARD ACT takes a stand against targeting students for credit card offers. Issuers cannot market credit cards within 1,000 feet of a college campus or at college sponsored events. Issuers must also disclose their agreements with colleges and universities.

* The CARD Act forces a fairer distribution of payments. The minimum payment is still applied to the balance with the lowest interest rate. If a cardholder pays more than the minimum payment, the remainder will be applied to the balance with the highest rate.

"This could be very beneficial to those consumers who always carry a balance but only if you pay more than the minimum payment each month. However, some issuers have doubled the monthly minimum from 2.5% to 5% during the past year for some cardholders. So it may be more difficult for these consumers to realize the benefit from this provision," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

* Due dates for monthly payments will be more standardized and predictable. The due date must fall on the same day each month. If that date falls on a weekend or holiday, payments are credited on the next business day without a late penalty.

* Consumers cannot be charged a fee for paying their bill unless they choose an expedited payment.

* Your statement must clearly explain how long it will take to pay your balance if you only make minimum payments. It must also state how much you need to pay each month in order to eliminate your balance in three years.

* The CARD Act adds some restrictions to rate increases, but your APR can increase if you have a variable rate card and the card's index increases. Issuers do not have to give you a 45-day notice if this is the reason for the rate increase.

* The CARD Act softens the penalty for late payments. If you are more than 60 days late for a payment, your APR can be increased. But if you have six consecutive months of on-time payments, your APR has to be restored to its previous level. Some issuers are changing the name on this from "default pricing" to "penalty pricing."

* The CARD Act does prohibit over the limit charges unless a consumer "opts in" to allow these transactions to go through and pay the penalty. Cardholders can opt-in orally, in writing or electronically. This can be revoked at any time. Those that opt in can only be charged one over the limit fee per billing cycle if they exceed their limit, not multiple fees.

* Proof of income is required for new credit. Consumers must prove their ability to make required payments before they can open a new credit card account or increase the credit limit for an existing credit card account. Issuers must consider the ratio of debt obligations to income, the ratio of debt obligations to assets, or the income the consumer will have after paying debt obligations

* Fees on secured cards cannot be greater than 25% of the initial credit limit.

* Those companies advertising a "free" credit report have to explain how consumers can obtain a free credit report once a year from each of the credit bureaus

* Issuers must provide toll-free numbers for consumers to get information about nonprofit credit counseling and debt management assistance.

Major Changes Ahead for Student Credit Cards

The Credit CARD Act will take effect in two weeks and one of the major provisions is the restriction on marketing credit cards to young adults under 21.

"Right now, it is easier for a college student to get a credit card than to get up for class. College students use credit cards to pay for everything, just like their parents. Once this new law takes effect, many college students will have difficulty getting a credit card," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Beginning February 22, issuers are not able to offer free merchandise to lure students to sign up for a credit card on college campuses, at college sponsored events (like sporting events) or within 1,000 feet of the campus. In addition, the CARD Act bans credit cards to people under 21 unless there is an adult co-signer or the young adult can show proof they have the income to pay the debt.

"The regulations leave 'sufficient income' open to interpretation. Some issuers will just want to know that your monthly income is more than your minimum payment due. However, students need to assess their own situation. If you are struggling to pay for your own food, housing, transportation and education bills, you can't afford to carry a balance on a credit card," says Hardekopf.

Credit lines will also start out low. If there is no co-signer, credit lines will be $500 or 20 percent of the student's annual income. If the student has more than one card, the credit line from all credit cards will be up to 30 percent of the annual income.

College is a good time for students to learn how to correctly use credit cards and build up their credit score. However, many students are unprepared for the responsibility.

A 2009 Sallie Mae study showed that college students used credit cards more than ever before. 84% of college students have at least one credit card, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173 which represents a 46% increase over the 2004 figure of $2,169. The average student has 4.6 credit cards.

Only 17% of college students pay off their entire balance each month and 1% had parents or other family members paying the whole balance. The remaining 82% carried balances and paid finance charges each month.

Parents must educate their students about using a credit card. One-third of students rarely or never discussed credit card use with parents, and nearly all undergraduates would like more information on financial management topics.

"Parents can make the co-signing for a credit card a very teachable moment. Tell your student how to deal with credit cards and the pitfalls that exist. Explain how to read the monthly bill and how important it is to pay the balance in full at the end of each month. Give them real-life examples of the credit card mistakes you have made so they can avoid making the same mistakes," says Hardekopf.

Options for Credit for College Students

1. Co-sign.
The student can apply for a card with an adult co-signer. If the student is unable to pay off the account, the credit card issuer will demand that you pay off that debt in full.

The loan will be reported on the student's credit report. If it is paid on time and more than the minimum, it will help increase credit scores. However, adding your name to someone else's debt is a very serious financial step because this mixes your credit record to your child's. If either the student or parent defaults, mistakes become community property and everyone suffers because the co-signer has committed to
make good on this account. Delinquencies will show up on both credit reports. The only way to get your name off of the loan is to pay off the loan.

As a cosigner, your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations.


2. Authorized user.
This is almost like an apprenticeship to teach your student how to use a credit card. You give your student authorized permission to use your credit card by adding him/her to the account. The student can receive and use a card with his/her name on it without being legally responsible for repaying the credit card balance.

The account is considered the same for credit scoring as if it were owned by the authorized user. If you have a good credit score, your student will benefit from that. However, if you have a couple of late payments or get into trouble, this will also affect the authorized user. Authorized users can be removed with a letter or phone call to your issuer.


3. Open a Checking Account with a Debit Card.
A checking account with a debit card is a good first step toward learning how to manage credit. While debit cards have their own fees and downfalls, college students can get into far less trouble paying a $30 overdraft fee than running up a significant credit card balance and it does not pull down your credit score.


4. Prepaid cards
Opening a prepaid card may be the easiest option for students, but their fees are higher. Make sure the card reports payment activity to credit bureaus (many secured and prepaid cards do not). AccountNow prepaid Visa reports to all three agencies. The
processing fee is $19.95, the monthly fee is $4.95 and there is a $0.50 transaction fee per transaction.


"Prohibiting promotional offers and marketing on campus will be help reduce impulse applications. If your student is qualified to apply for a credit card, help them research credit card offers to find the best card with the lowest rate. Use the Terms and Conditions to compare cards and to explain the fine print," says Hardekopf.