A Big Loophole in the Credit CARD Act: Variable Rates

This is a guest post by Bill Hardekopf, CEO of LowCards.com.

The Credit Card Accountability, Responsibility and Disclosure Act was passed in May to protect consumers from large interest rate increases, spiraling fees, and changing terms. Despite the hype about the bill and politicians promising to help protect cardholders against unfair rate increases, last week the public learned of a provision in the bill that still allows for credit card companies to raise rates without giving any notice or warning, even after the bill goes into effect.

“There is a tremendous loophole in this law and it is those credit cards with variable rates.” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “Now that we are learning more about the details of the bill, surprises like this may start coming out.”

The law requires credit card companies give 45 days notice of a rate increase, but only if the card has a fixed rate. The law also requires rates to stay the same for one year after a new account is open, but only for fixed rates.

Many credit card issuers and banks are rushing to switch their fixed rate cards to variable rates ahead of the new law.

“Bank of America and Chase have both announced that they are switching fixed rate cards to variable rates. They are probably hoping that consumers will
not notice the change right now because the prime rate is so low. With the current prime rate, most APRs will remain the same even with the switch from a fixed to a variable rate. However, once the Fed starts raising the prime rate, it is going to make the variable rate cards increase automatically and without much notice or warning,” says Hardekopf. “The prime rate is the lowest we have seen in history. Rates won’t stay at historic lows forever.”

Both Chase and Bank of America state that because of the changes in regulations, they are forced to make the changes to variable rates to keep up with the market. Other credit card companies have not changed their fixed rate cards to variable rates, but Hardekopf thinks it is only a matter of time.

“When you look at what is happening, you have to wonder if this is what Congress intended” said Hardekopf. “I suspect they are going to have to amend the bill and make changes to correct this glaring loophole.”

According to news reports, Senator Chris Dodd, one of the sponsors of the bill, spoke out against rate increases last week and sent a letter to the Federal Reserve and other regulators, asking that they make and enforce rules forcing credit card companies to abide by a provision of the new law designed to prevent rate hikes before the law starts affecting the companies. That provision says that credit card issuers must review every six months any account where the rate has been raised since January 1, 2009. If the customer has become less of a credit risk, or the circumstance no longer warrants an increase, it directs the companies to reduce the rate.

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LowCards.com 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. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1260 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.