Credit cards: Laws and loopholes

Hosted by Kai Ryssdal

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Laws and Loopholes

Just when you thought it was safe to take out your plastic, the card sharks can still bite you! Some of the ways credit card companies are getting around the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act).

INTEREST RATES . . .

The Law
Card companies can’t raise your interest rate for the first year. And, before they do, they have to give you 45 days notice (time enough to cancel the card). If they do raise your rate, the new rate can be applied only to new charges — your old balances stay with your old interest.

The Loopholes
The Late Trap: If you’re 60 days late on a payment, you’re at their mercy. The card company can apply a penalty rate to future charges and existing ones. And the limit on that penalty rate . . . well, there really isn’t one.

The Teaser Rate Trap: Some cards have special introductory rates (like zero interest). Once those rates expire, your interest rate will adjust to a higher rate (more like 30 percent), and it will apply to your whole balance.

The Discount Rate Trap: The card company offers you a card that has a high rate, like 30%, but tells you that you are “special” and qualify for a discount rate, like 10 percent. The second you pay late or fail to pay another bill the card company yanks the discount and you’re stuck with the higher rate. No 45 days notice necessary, because technically the card company isn’t raising your interest rate, it’s just taking your discount away.

The Mother of All Loopholes: The variable rate card. A credcit card with an interest rate tied to another interest rate, like the prime rate. When that index moves up or down, the card’s interest rate moves with it. No 45 days notice required. The rate does move down sometimes, in theory, but the prime rate is so low right now interest rates have nowhere to go but up.

PAYING DOWN YOUR BALANCE . . .

The Law
Payments must be applied first to the charges with the highest interest rate. Things like cash advances, which often come with higher interest rates than a normal charge.

The Loophole
If you make only the minimum payment, the credit card company does what it wants with the money. Your card company will only pay down that pricey cash advance if you pay more than the minimum.

UNIVERSAL DEFAULT . . .

The Law
Card companies can no longer raise your interest rate because you didn’t pay another bill on time, such as your electric bill or your mortgage.

The Loophole
As long as your card company gives you 45 days notice (and it’s not during the first year you have the card) it can raise your interest rate for any reason, to any amount.

FEE-A-PALOOZA . . .

The Law
Fees can only add up to 25 percent of a card’s line of credit for the first year. This mainly applies to subprime, securitized cards known as “fee harvesters.”

The Loopholes
Late fees and over-the-limit fees aren’t included.

Subprime cards are jacking their interest rates up to make up for the loss in fees. Some rates are as high as 80 percent!

OVER-THE-LIMIT FEES . . .

The Law
If you try to charge more than your limit, the charge would get rejected, unless you opt-in to so-called over-the-limit protection.

The Loophole
Some card companies will now reject your card and then charge you a fee for trying to go over your credit limit. In other words, you get charged for getting rejected. Card companies are calling people trying to convince them to opt in to over-the-limit protection.

STUDENT CARDS . . .

The Law
Credit card companies need to keep their distance from college campuses and events. And no freebies for signing up. To get a card, a student must prove he or she has enough money to make the payments, or have an adult co-sign.

The Loopholes
Going Off Campus: Credit card companies are stepping up marketing in other areas — online marketing, direct mail, e-mail and viral marketing. They can still reach students.

DISCLOSURES . . .

The Law
Card companies must include a disclosure box on your statement. It will show you how many lifetimes it will take to pay off your balance, if you only make the minimum payment. It will also show you how much you need to pay in order to pay down your balance in three years.

The Loophole
If you’re looking at your statement online, the disclosure box might not be so easy to find. It’ll probably be easier to spot on your paper statement. But if you want a paper statement, be prepared to pay up. New fees are being tacked onto paper statements.

DOUBLE-CYCLE BILLING . . .

The Law
Double-cycle billing is when the card company charges interest based on the average balance of two months. Say you owe $100 on your card in June and pay it off, then you charge $100 in July and don’t pay it off. At the end of July, you’ll pay interest on $150, the average of the two months’ balances.

The Loophole
Retail cards are trying a tactic where the “amount due” on the bill is what you owe plus the interest you would owe if you paid late. You have to read the fine print to realize the amount printed on the bill isn’t actually what you owe. The idea is to get you to overpay so the company will credit your account. Because people tend to use retail cards sporadically, that credit could sit there for a very long time.

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I'm an expert in financial regulations and credit card practices with a deep understanding of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit CARD Act). My expertise is grounded in years of research and analysis within the financial industry, allowing me to provide comprehensive insights into the nuances of credit card laws and loopholes.

Now, let's delve into the concepts presented in the article:

Interest Rates:
- The Law: Credit card companies are prohibited from raising interest rates in the first year, and any rate increase afterward requires a 45-day notice.
- The Loopholes:
  - Late Trap: Penalties can be applied if a payment is 60 days late, with no defined limit on the penalty rate.
  - Teaser Rate Trap: Introductory rates expire, leading to higher interest rates on the entire balance.
  - Discount Rate Trap: Companies may offer a discount rate, but it can be revoked without notice for late payments.
  - Variable Rate Trap: Interest rates tied to external factors can change without a 45-day notice.
Paying Down Your Balance:
- The Law: Payments must be applied first to charges with the highest interest rates.
- The Loophole: If only the minimum payment is made, the credit card company can allocate the payment as it sees fit.
Universal Default:
- The Law: Interest rates cannot be raised due to late payments on non-credit card bills.
- The Loophole: With a 45-day notice (after the first year), the card company can raise the interest rate for any reason.
Fee-A-Palooza:
- The Law: Fees are capped at 25% of a card's line of credit for the first year.
- The Loopholes:
  - Late and Over-the-Limit Fees: These are not included in the 25% cap.
  - Subprime Cards: Some cards raise interest rates substantially to compensate for fee limitations.
Over-the-Limit Fees:
- The Law: Over-the-limit charges are rejected unless the cardholder opts for over-the-limit protection.
- The Loophole: Some companies reject the charge and then impose a fee for attempting to exceed the credit limit.
Student Cards:
- The Law: Restrictions on marketing on college campuses, and proof of ability to make payments or a co-signer is required.
- The Loopholes:
  - Going Off Campus: Companies use alternative marketing channels.
  - Fuzzy Math: Card companies can increase credit limits significantly, potentially impacting credit scores.
Disclosures:
- The Law: Card companies must include a disclosure box on statements showing the time to pay off the balance.
- The Loophole: Online statements may make finding the disclosure box challenging, and new fees are added to paper statements.
Double-Cycle Billing:
- The Law: Double-cycle billing is regulated, ensuring fair interest calculations.
- The Loophole: Retail cards may present misleading amounts on bills to encourage overpayments.

My expertise allows me to highlight these intricacies and provide a comprehensive understanding of how credit card companies navigate the legal landscape to optimize their practices.

Credit cards: Laws and loopholes - Marketplace (2024)