If you have ever watched helplessly as the interest rate on your credit card went up, pay attention: The rules that govern that piece of plastic in your billfold changed Thursday in your favor.
Card credit issuers now have to give borrowers at least three weeks to make a payment and 45 days' advance notice of any rate change. During that time, consumers can search for a better deal, or close their accounts and pay off the balance at the old rate.
More Rights For The Consumer
Before the first part of the Credit Card Accountability, Responsibility and Disclosure Act took effect this week, credit card companies didn't always have to warn credit card users that their rates were going up.
A late payment — or charges exceeding a credit limit — could trigger an immediate bump. And consumers had little recourse but to try to pay it all off.
Credit card issuers say adjusting their interest rates this way was simply risk management. If a borrower becomes riskier, the interest rate needs to go up to compensate.
But consumer advocates and members of Congress who pushed for the new law say this practice hurt those who could least afford it.
"That is what contributed to people going further and further into debt," says Eleni Constantine, director of consumer financial research at Pew Charitable Trusts, a nonpartisan group.
She says the new law is an important measure to protect consumers.
"The purpose of the new law is to get interest rate increases to more accurately reflect the costs of lending and the risks associated with lending, and to increase competition in this space so that consumers could choose among different products," Constantine says.
A Jump In Rates
Credit card holders have seen their rates increase about 1 percentage point in the last year. But Pew found that the rates advertised to potential customers have also jumped — 20 percent since December. In fact, rates are up the most for new customers least likely to default.
Pew also noted that these increases came during a period when the banks' cost of borrowing declined.
Nessa Feddis, vice president and senior counsel at the American Bankers Association, which represents the credit card industry, says credit card rates are tied to the probability of default — not to federally set rates.
"Because of the economy, because unemployment is so high, many people are not repaying their loans," Feddis says. "The first bill people stop paying is their credit card bill. And because those losses are higher, interest rates are higher."
Even those with good credit, she says, will face higher costs overall. And she says lawmakers — not the credit card industry — made this choice.
"When Congress made these decisions, it understood that it would be harder for people and for small businesses to get credit cards, and that limits would be lower, and that credit card interest rates in general would go up across the board," Feddis says. "But they made the decision that it would be an acceptable compromise for the consumer protection."
A Clearer Picture
Consumer advocacy groups say the credit card industry would naturally like to shift blame to Congress for higher consumer costs.
The main benefit of the law, they say, is that it will force card companies to disclose their various fees and interest rates.
That doesn't mean consumers will pay more — or less — in the aggregate. It simply means that when the rest of the law takes effect in February, people will have a clearer idea of what they are paying for.
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