Today’s guest post comes from Odysseas Papadimitriou, CEO and Founder of CardHub.com, an online marketplace for credit card offers.
When applying for a credit card, you want to know the full story before you hand over your Social Security number and other personal information to the credit card company. However, if you look at a credit card application on most issuers’ websites, you will find that even though the new credit card law (Credit CARD Act) has been effective since February 2010, these applications still do not spell out the things you need to know about your rights related to interest rate increases.
The Credit CARD Act was designed to enforce standardized guidelines for the way credit card companies can increase the interest rates on existing balances – in other words, things you have already bought. While it does that, the law has a much harder time enforcing the clarity with which these companies need to disclose consumers’ rights on their applications.
The CardHub.com Penalty APR Study evaluated the post-CARD Act applications of the top ten credit card issuers (based on outstanding balances) on the clarity with which they explain the restrictions on interest rate increases. The study focused on credit card applications, not Cardmember Agreements, as that’s what consumers see before they apply for the credit card. The study rated 6 of the top 10 issuers poorly in the majority of categories based on vague or misleading information in their terms and conditions. This is not surprising, however, since the study found that the Sample Statement from the Federal Reserve’s Consumer’s Guide to Credit Cards was equally unclear.
Typical problems included failure to distinguish the difference between triggers for an interest rate increase for a new and existing balance, failure to disclose how to get back down to the regular interest rate on an existing balance, and failure to explain consumers’ protection from interest rate increases in the first 12 months of their agreement.
Although the credit card companies may prefer you didn’t know it, they all must adhere to the same requirements outlined by the Credit CARD Act. So don’t waste your time with the fine print, the credit card companies must adhere to the following rules for all general consumer credit cards:
1) The Credit CARD Act prohibits a rate increase of any kind to your existing balance, unless you are a full 60 days delinquent in making a minimum payment. You have the same protection for all portions of your balance, including future transactions, during the first 12 months of your agreement. Furthermore, if your interest rate is increased on an existing balance because you were 60 days delinquent, the credit card company must bring it back down to your regular rate after 6 consecutive months of timely payments.
2) If the credit card company increases your interest rate for future transactions, they must send you notice of the rate increase 45 days in advance, and may only apply the increase to transactions made 14 days after they sent the notice. The credit card companies reserve the right to change the interest rate on future transactions for any reason and at any time, but you should also be aware that you can reject any changes they make to your policy. Although this will probably make it so you cannot make any future transactions, you will still be able to pay down your existing balance at your regular interest rate without having to worry about a sudden rate increase of any kind.
Until credit card companies simplify their disclosures, reading the fine print related to interest rate increases is a worthless pursuit. Just remember that you’re protected from an interest rate increase on your existing balance, and use your reading glasses for something better.