The Fine Print

Why Credit-Card Reform Comes Up Way Short

A new act by Congress and new rules that were enacted by Federal Reserve Board are beginning to protect consumers against some of the underhanded strategies that are used by credit-card companies. But the reforms leave holes for banks to exploit, and you can expect your monthly payments to keep rising. 

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The credit-card industry long has used generous rewards to entice you even as it littered your monthly statements with loan-shark interest rates and countless fees for the smallest of infringements. But after the recession struck, credit tightened and more consumers started to default on their accounts. Between 2007 and 2008, credit-card issuers cut the limits and hiked the interest rates on 70 million cards—about 25 percent of all accounts—according to The Pew Charitable Trusts. As a result, credit-card companies raked in $10 billion on top of the revenues that they earned from the standard rates and fees that they charged us.

After being pressured by Congress to take action, Federal Reserve Board announced in December 2008 a series of regulations that ban certain practices. Unfortunately, these don’t go into full effect until July 2010: Banks essentially were granted an 18-month window, which they used to raise rates and rewrite their fees in anticipation of the new rules.

Congress then stepped in and passed its own set of regulations in May—the Credit Card Accountability, Responsibility and Disclosure Act of 2009. The original version of the bill required all reforms to take effect within 90 days. But most of the regulations won’t go into effect until Feb. 22, 2010. That’s because the credit-card industry, which expects to lose $12 billion as result of the new restrictions, successfully lobbied to receive a 9-month lag for the rules to take effect.

Consequently, even as consumers defaulted on their credit-card accounts at a record clip of 10.44 percent in June, banks took advantage of this up-for-grabs period prior to Feb. 22 to boost rates, fees and minimum payments. They claim that they’ve taken these actions partly because of the rising cost of doing business.

Odd, isn’t it? The banks supposedly need 9 months to respond to reforms, yet they wasted little time in attempting to recoup their “losses.”

Unfortunately, the bad news doesn’t stop there. Although the reforms close the door on a slew of egregious practices, they leave open the windows to a variety of others. Regardless of whether you pay on time each month, reform by itself will not lower your credit-card bills. In fact, unless you’re in a position to overhaul your financial habits, you can expect your monthly payments to increase in the near term.

One of the biggest problems is that the reforms don’t prevent lines of credit from being arbitrarily reduced or shut down. Indeed, that’s what’s happening now, says Bruce Cornelius of, an independent credit information site. Banks cut limits to make themselves appear less shaky financially to regulators. Obviously, that makes it easier for you to exceed your credit limit and incur penalty fees. But it also drives down your credit score, and that could make you look like a heavy debt-user and a high default risk.

Lawmakers have trumpeted the parts of the reforms that require banks to make their terms easier for you to read and understand. But Lloyd Constantine, who is the author of “Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel,” believes that the clarity is overhyped. He says the fine print could be magnified on a 60-foot billboard, and it wouldn’t do any good for the most vulnerable of credit-users: the roughly 35 million Americans who make just the minimum payment each month. They’ll still borrow money, and we believe that the industry still will abuse them.

VARIABLE-RATE BLUES. The reforms don’t prevent credit-card companies from changing the terms of your agreement with them; it just requires them to give you a heads-up sooner. Effective Aug. 20, the legislation required companies to notify you 45 days—instead of 15—before they made any changes, such as rate increases, to your account.

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