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Fed Closes More CARD Act Loopholes

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Since the Credit CARD Act was signed into law on May 22, 2009, credit cards have become safer and their terms more straightforward—at least according to the Consumer Financial Protection Bureau. But regulators continue to scrutinize the industry as some creative card issuers continue looking for ways to boost their bottom line.

In its final rule implementing the CARD Act, scheduled to go into effect October 1, 2011, the Federal Reserve Board eliminated two potentially lucrative loopholes.

First, the new rule takes aim at a trick that allowed issuers to charge higher rates if cardholders tripped up. Under the CARD Act, introductory rates have to last for at least six months. And card issuers can’t raise the rate on a new credit card during the first year unless the cardholder falls behind by at least 60 days, or the card features a variable interest rate and the underlying index goes up. After the first year, issuers can raise rates on future purchases provided they give 45 days’ advance written notice and the option to opt out. But they can’t raise rates on an existing balance unless the cardholder is 60 days delinquent or the card carries a variable rate that adjusts.

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Rather than impose hair-trigger increases on promotional rates, at least one issuer experimented with an opposite approach. According to CardHub.com, Citibank offered a program through which it would waive a portion of the promotional interest rate for cardholders who paid on time, but would charge the full interest rate if the cardholder missed a payment. The board has now ruled, come October 1, that promotional rates that waive interest have to operate under the same rules as other promotional rates. In other words, a card issuer that offers to waive interest charges for six months will be prohibited from revoking the waiver and charging interest during the six-month period unless the cardholder is 60 days delinquent.

The second issue relates to fees, and was aimed at “fee harvester” cards marketed to consumers with little or no credit history. The CARD Act prohibits issuers from charging first-year fees that exceed 25% of the initial credit limit. If your credit limit is $300, for example, fees charged in the first year can’t total more than $75. To get around this, a few issuers charged application fees before a cardholder even opened an account. Combined with other fees charged the first year, those fees exceeded the cap described in the original CARD Act. Under the board’s new rule, an application fee explicitly counts toward the first year’s total fee cap.

It’s worth noting that although certain fees and methods of charging interest are prohibited under the Credit CARD Act, that law does not cap interest rates. Consumers with damaged credit may simply find themselves with fewer low-rate options available.

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