What to Expect As New Rules on Credit Cards Take Effect

From the Wall Street Journal

Credit-card users get new protections this week, the first of a series of federal actions that constrain card issuers from changing terms on customers.

Starting Thursday, banks must comply with parts of the recently passed Credit Card Act of 2009 by mailing bills at least 21 days before their due dates and providing at least 45 days’ notice before making a significant change to their rates or fees. Currently, banks are generally required to mail billing statements at least 14 days in advance and provide a 15-day notice of altered fees or rates. The new rules also will bar banks from increasing fees and rates without warning when a consumer misses a payment or exceeds a credit limit.

Consumers also will be allowed to avoid future interest-rate increases and pay off any outstanding balance over time under the original rate terms. Currently, if a consumer gets hit with a penalty rate, for example, they aren’t given the option to reject the rates.

The bulk of the legislation’s key provisions will take effect in February 2010, including limits on interest-rate increases on existing balances. The following July will see the introduction of new disclosure rules, drafted and approved by the Federal Reserve Board and other banking regulators.

In anticipation of the legislation, major card issuers have been raising interest rates and fees, reducing credit lines and closing accounts. Banks say the changes also are being driven by the weak economy, which has resulted in higher losses and funding costs. Earlier this month, for example, American Express Co. notified its Blue, Optima and co-branded credit-card customers that it was raising interest rates by an average of two to four percentage points. Other changes to these cards, which take effect with customers’ October billing statements, include higher rates and fees for cash advances and late payments. American Express also eliminated fees for customers who exceed their credit limits, months before the legislation clamps down on a host of card fees.

Favoring Variable Rates

Other issuers, such as Bank of America Corp., J.P. Morgan Chase & Co.’s Chase Card Services and Discover Financial Services, recently converted customers’ fixed rates to variable ones. The changes will make it easier for issuers to bump up the rates they charge without notifying customers. By contrast, banks must currently notify fixed-rate card holders of any change in rates.

Banks are also paring back their rewards programs. Citigroup Inc., for example, has started adding annual fees to some of its rewards cards, such as the Citi Diamond Preferred Rewards card. Under the Discover More Card rewards program, customers can earn an additional 5% back on purchases in categories that rotate quarterly; for the third quarter, however, the cap on purchases that qualify for the cash-back bonus was lowered to $300 from $400. Meanwhile, Chase last fall scaled back the bonus opportunities on its no-fee Chase Freedom cards. For Chase Freedom card customers wanting to earn a fixed 3% bonus for spending in the grocery, gasoline and fast-food categories, Chase now levies a $30 annual fee.

While the new legislation will help eliminate sudden rate increases and force more disclosure, the banking industry has said the restrictions will reduce available credit. The cost of borrowing also will rise, companies say, since they will have to be more careful about giving credit. Average interest rates on credit cards rose slightly to 14.43% through May, according to the Federal Reserve, although rates are still below historical levels of 18% and 19% that were typical 20 years ago.

According to Consumer Action’s 2009 credit-card survey, which looked at 39 cards from 22 financial institutions, rates and fees began climbing this spring. The advocacy group said more credit cards now come with minimum cash-advance fees and higher balance-transfer and foreign-transaction fees.

“There’s no question that issuers are taking advantage of this window before it closes to make as many changes as freely as they’ve been accustomed to,” said Ruth Susswein, Consumer Action’s deputy director, national priorities.

Changes to card terms are causing some consumers to alter their spending patterns.

After Bank of America raised his 7.9% fixed rate to a 13.9% variable rate last spring, Mark Nilles paid off his remaining balance, shopped around for another card and canceled his BofA card. In the future, the Arvada, Colo., hydrologist said he plans to rely on savings or shorter-term, fixed-rate loans instead of credit cards to pay for one-time expenses.

“It made me reassess everything that I was doing credit-wise,” said Mr. Nilles.

More Fudge Room

For now, consumers should check their statement due dates to make sure they’re getting the required additional time to pay their bills. Some people may want to adjust any automatic debits coming out of their checking accounts to make sure they’re not paying their bills sooner than they need to, said John Ulzheimer of Credit.com, a consumer-education Web site. “This gives you a little more of a fudge period,” he said.

Consumers are likely to find better credit-card deals if they also have a checking account at the bank. Under Chase Card Services’ Chase Exclusives program, for example, Chase Freedom card holders who also have checking accounts at the bank can earn up to 10% more points on their spending.

The bank also rolled out a new credit card, “Slate From Chase,” that automatically refunds the 12th month’s interest charges each year if customers enroll in the bank’s AutoPay program from a Chase checking account.

Meanwhile, for a limited time, Citi is offering some customers an additional 2% cash-back bonus on qualified spending on Citi credit cards if customers also have a banking relationship at the company.

Write to Jane J. Kim at jane.kim@wsj.com

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