Nearly four years ago, I was excited to report that the credit card holder’s bill of rights was finally to become law.
This legislation, now known as the CARD Act of 2009, is the most sweeping piece of personal finance legislation to be passed in a decade.
At the time, consumer advocates and credit card industry observers like myself knew that the law would not be perfect. But what we didn’t know was how it would be imperfect. Credit card issuers would do their best to exploit loopholes and work around restrictions, but what would that look like?
Four years down the road, we are starting to see a clear picture of the way in which the spirit of the CARD Act is being circumvented.
1. Marketing to Users Under 21
One of the things that the framers of the CARD Act hoped to end was the lending tactics targeted at college students. Credit card issuers were notorious for handing out t-shirts, duffle bags, and other goodies in return for completing a credit card application. The banks then issued cards to students with little regard to their ability to repay.
The new law was supposed to prevent this by prohibiting the award of tangible items and by requiring applicants under 21 to show that they had the means to repay their debts. But instead, card issuers are now awarding other non-tangible benefits for credit card applications. According to the Federal Register, these awards now come in the form of discounts, reward points, or promotional credit terms. In fact, the Wall Street Journal detailed all of the ways that banks were circumventing this provision.
In addition, banks were also getting around the prohibition on lending to students who couldn’t repay the loans. According to Jim Hawkins at the University of Houston Law Center,
“27.27% of students under 21 who were applying by themselves for credit cards listed loans as part of their income to qualify for the card.“
Just like mortgage applications during the housing bubble, banks simply ask applicants to state their income, and then accept them at their word.
2. Applying Payments to the Highest Interest Rate Balance
Before the CARD Act, banks were free to offer 0% APR and other promotional financing deals with low interest rates. Then, the banks would apply payments to the lowest interest rate balances first, before crediting the higher interest rate. As a result, cardholders incurred much more interest.
The CARD Act largely put a stop to this practice, but left a gaping hole. It turns out that banks must only credit payments above the minimum payment to the balance with the highest interest rate. But they can continue to treat the minimum balance the same way they used to.
And don’t thing the card issuers haven’t noticed this. For example, one version of the Discover Card’s newly released Discover It product offers 18 months of interest free financing on balance transfers, but only six months of 0% APR financing on new purchases. So for 12 months after the promotional financing on new purchases expires, cardholders can still see their minimum payments applied to a 0% APR transferred balance, while an interest rate as high as 20.99% accrues on their purchases.
3. Business Cards
One of the biggest loopholes of the CARD Act is that credit cards marketed as business cards are excluded from following many of the laws provisions. According to a report by the non-profit Pew Charitable Trust, 80% of business cards have terms that still permit changes to interest rates at any time. 84% of these cards still allow their issuers to apply payments to low-rate balances first. And 67% of business cards have penalty rates for late payments. All of these practices are otherwise prohibited by CARD Act protections.
And the fact is, there is no reason why consumers can’t apply for, receive, and use these cards just like businesses do. Furthermore, one cannot help but notice that so many of the best reward credit card offers are now featured on business cards.
4. Due Dates
Before the CARD Act, a big problem for cardholders was banks crediting payments as late. Sometimes, the due date would change month to month, while other banks would claim that the payments received after a certain time of day were late.
The CARD Act now requires that credit cards have a consistent due date each month. Furthermore, banks must credit payments as on-time when the bank is closed on a weekend or holiday and the bank is unable to accept a payment that day.
To get around this rule, banks are claiming that they can accept payments electronically or over the phone, 365 days a year. The banks don’t receive mail, and most checking accounts won’t make electronic payments on weekends or holidays, yet they still claim to be able to accept a payment. Therefore, if your bill is due on July 4th, and your payment is received on the 5th, almost all banks will count it as late, contrary to the spirit of the CARD Act. That is precisely what happened to this unhappy reader of the Cleveland Plain Dealer.
5. Fixed Rates
Another common strategy before the CARD Act was banks that offered a fixed rate, only to raise it a short time later. The CARD Act now requires that the interest rates for cards marketed as having a “fixed” rate now remain the same over a specified time period.
In reaction, card issuers simply dropped the word “fixed” from their marketing material and informed existing cardholders that their accounts will now be variable. Thankfully, the CARD Act requires that cardholders be given 45 days notice before changing a rate, and that cardholders be allowed to pay an existing balance at the previous rate.
The CARD Act has improved the experience of holding a credit card account for many. By understanding the loopholes in this law, and how the banks are using those loopholes, you can take the steps necessary to remain a responsible credit card user.
What’s been your experience with the CARD Act? Has it provided a better experience when dealing with banks and credit cards? Have your interest rates risen? Have you had more difficulty being accepted for cards and turned to other forms of credit? Have you experienced any of the loopholes above?