WASHINGTON — The credit card legislation signed by President Barack Obama in May provides consumers their first morsel of relief on Thursday when card issuers must begin giving more notice before imposing rate increases or charging late fees.
Beginning Aug. 20, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 increases the required notice before raising credit card interest rates to 45 days from 15 days.
The new law offers cardholders another perk: A consumer can now decline a rate increase by closing the account and agreeing to pay off the balance at the current rate within five years.
"So (consumers) can effectively convert their balance into a closed-end loan that they can pay down over five years. That's a tool that they didn't have up until now," said Eleni Constantine, the director of the Pew Charitable Trusts Financial Security Portfolio.
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"Now if you don't like your rate, you can close your card, but the rate is already in effect without getting any notice and it applies to your existing balance. This gives people a little more leverage to say, 'No, I'm going to go shop around for another card.'"
Cardholders who rack up late fees also will get a break under the new law on Thursday. The legislation requires that monthly billing statements be mailed or delivered at least 21 days before the due date to charge a late fee. The fees can now be applied after only 14 days notice.
These first provisions aren't the bill's strongest or most important. Most of those measures, such as requiring adult co-signers for card applicants under age 21 and banning retroactive rate increases, won't take effect until February. Other provisions will take effect next summer.
In the meantime, credit card companies are trying to increase profits to offset presumed revenue declines that the new rules will likely cause, said Bill Hardekopf, the chief executive of LowCards.com, a consumer Web site that monitors the card industry.
Specifically, card issuers are increasing interest rates; introducing more cards with annual fees; raising other fees, such as balance-transfer fees; moving from fixed-rate to variable-rate cards and cutting rewards and bonus offerings, Hardekopf said.
He and other consumer advocates wonder why Congress gave the card industry so much time before the laws took effect.
"If credit card issuers need to make a change to increase the (annual percentage rate) or increase a fee, or anything that benefits them, they can do that very, very quickly, so I don't know why the government gave them so much time to make those changes," Hardekopf said.
Gary Martin, of Shreveport, La., watched as the interest on his credit card rose from 9.9 percent to 21 percent earlier this year after his account was purchased by a large national bank. Then last month, it jumped again to 29 percent, and his account was closed without his consent.
Martin, 65-year-old disabled Army veteran of the Vietnam War, said the card company told him that negative information from a credit reporting agency caused both actions. However, he said he never missed a payment, always paid more than the minimum amount due and hasn't used the card for more than a year.
If the new 45-day grace period on interest rate increases had been implemented sooner, Martin said he would've used the extra time to transfer the balance to other cards and seek another one with a better rate.
"If we had not allowed all that time, (Obama) would have saved Americans millions of dollars," he said. "I know about Congress and I know about lobbyists and I know laws take time to go into effect, but there's a ton of people out there eating it right now, and there's gonna be more."
However, Lynne Strang, the vice president of communications for the American Financial Services Association, said the extra time was needed to "reprogram computers, redesign forms, train employees and implement a host of other internal preparations to comply with the new law's requirements."
As for the rate increases, Peter Garuccio, a spokesman for the American Bankers Association, said card companies are simply adjusting to changing market conditions, specifically the recession. He added that uncollectable credit card debt is approaching 10 percent, and that increases costs "because those who pay their bills on time are essentially being asked to pay for those who don't pay their bills at all."
An upcoming review of nearly 400 credit cards by the Pew Trusts Safe Credit Cards Project found that interest rates increased by a median of 2 percentage points in the first half of the year, even though it was cheaper for banks to lend money because the federal target funds rate — the rate banks use for loans to each other — fell by at least three-quarters of a point.
However, investors also provide funds for credit card companies to lend, and many aren't as willing to take risks with their money as they were before the recession.
"The economic situation dictates to a degree, that if you're going to invest your money, you're going to demand a higher rate of return and that increases the cost," Garuccio said.
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