Will Fed Limit Credit Card Rate Increases?

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

Senator Charles Schumer called on the Federal Reserve to immediately limit rate increases on existing credit card balances. Schumer said credit card companies are rushing to raise rates and fees ahead of the Credit Card Accountability Responsibility and Disclosure Act that will take effect in February 2010 and will limit rate increases and fees.

“This is what many of us feared about a law that didn’t take effect right away,” Schumer said. “Issuers are using the delay in the effective date to wring more dollars out of their customers. It is against the spirit of the law and it is just plain wrong.”

Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook, said it is doubtful that the Fed will act on Schumer’s request and that we have seen credit card issuers making substantial changes in rates and fees throughout this year, not just since the bill was signed into law. “The credit card reforms that just passed were not a surprise. Issuers have known some type of changes were coming, so they have been making numerous moves since the start of 2009 to make up for their expected shortfall in revenue. We are starting to see these changes happen even more quickly now. Issuers are going to increase rates and fees while they can. They are not philanthropic organizations; they are out to make as much profit as possible. We doubt the Fed will get involved and stop any of this, but we applaud Senator Schumer for at least calling them out to do something about it.”

In May, LowCards.com studied the legislation and made the following predictions about how issuers would respond to the new regulations to make up shortfall in their revenue:

• Expect more increases in credit card interest rates. When the new regulations take effect, issuers cannot raise rates on a new customer for one year. So these ongoing interest rates will likely be increased before February. But consumers are also likely to see interest increases in their existing accounts during this period.

“Issuers do not have any of these restrictions in place until February so we think they will continue to implement the policies that are currently in place. Expect issuers to quickly increase your APR if you do anything to show that you are a greater credit risk,” said Hardekopf. “They still have the ability to raise your interest rates at any time for any reason. If you miss a payment, are late on a payment, exceed your credit limit or even use too much of your credit limit, you could see an increase in your interest rate the very next billing period. Consumers need to get their credit card bills in early, pay more than the minimum amount and not use more than one-third of their credit limit.”

• A cutback in rewards and cash rebates. That has already been taking place since the start of 2009 and will likely continue through the year. Pay attention to your rewards by looking at the terms and conditions of your card. Issuers can make subtle changes in the reward program that are hard to spot, like changing a tier needed to reach a certain payout or requiring purchases over a longer period. Maximize the points you have and use them sooner rather than later because these could also be reduced. American Express notified cardholders that it is reducing its rewards for the Blue Cash card on spending over $6500 from 1.5% to 1.25%. (Note: see a number of changes made by credit card issuers in 2009 at http://www.lowcards.com/industry/recent-credit-card-changes.asp)

• More cards with annual fees. “Approximately 20% of the credit cards have an annual fee at this time, but we expect that number to go up in the next year,” says Hardekopf.

• An increase in fees. While the regulations address the over-the-limit fees assessed on credit cards, they do not put any restrictions on fees for balance transfer, cash advance or late payments. This is already taking place as Bank of America and Discover increased balance transfer fees from 3% to 4% on June 1. Yesterday, JPMorgan Chase & Co. announced an increase of the minimum payment on balances from 2 percent to 5 percent for some customers. It also plans to raise the balance transfer fees to 5 percent in August.

- – - – - – - – - -

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.