Credit Card Reform: While One Hand Gives, the Other Adds Fees

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Significant parts of the new credit card law go into effect today that in theory will make it easier for cardholders to pay their bills without incurring fees, and to avoid digging themselves further into debt. Balancing out this good news is an onslaught of new fees and higher rates that nearly all cardholders can expect coming down the pike.

Here are the two big changes made official today:

You’ll get more notice. Credit card bills must be mailed to cardholders at least 21 days (not 14, which was the old minimum) before payment is due. You’ll also get 45 days’ notice (bumped up from 15 days) that changes in rates or fees are occurring. Apparently, some cards have already begun doing this, telling cardholders—in refreshingly plain, straightforward language—about increases in rates and fees.

You don’t have to accept the new terms. Yep, when you get your notice about increased rates or fees, you are allowed to reject them—with the stipulation that you can no longer use the card, and you must pay back any balance, at the old rates, within five years. reveals why this may be difficult for folks with large balances:

… rejecting changes to the terms of a contract could come at a price. While consumers will now have the right to reject an interest rate increase and cancel their cards, the new rules stipulate that the cardholder will have five years to repay their balance at the current interest rate.

That could result in a much higher minimum payment, since the time-frame to repay the debt will be condensed. Under the new rules, the minimum balance cannot go up by more than double.

When the balance is too large to be repaid within five years without more than doubling the minimum payment, it’s up to the credit card company to extend the time frame or determine a new rate.

What’s probably more troubling to the average cardholder is that, while some notice is nice, rates and fees are increasing across the board. From the Washington Post:

… consumer advocates warned that card companies will continue to raise rates, cut credit limits, scale back reward programs and close down inactive accounts, as they have been doing in recent months.

In a Pew report to be released next month, researchers reviewed the lowest advertised rates of nearly 400 credit cards and found that they rose two percentage points, a 20 percent increase, since December.

Cards are now more likely to have variable (rather than fixed) rates, and in some cases, those rates have doubled. One more way credit card companies are trying to turn a profit is by giving away less. Rewards programs are becoming less generous, specifically by adding new fees and limiting the amount of cash back cardholders can receive from purchases. From the WSJ:

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.

Compared to some nutty card fees being introduced, annual fees seem standard, expected even. Witness the rise of the “inactivity fee,” in which you’re charged for not spending money.

(Side note: Watch out for new debit card fees too, especially “overdraft protection,” which sounds nice, but actually charges big fees for customers taking out money they don’t have. What would happen if the customer didn’t have this “protection”? The card would be rejected at point of sale, therefore there would be no sale—and no fee. Instead, the card is accepted, and the cardholder gets hit with a $35 fee. Read a NY Times editorial bashing such “protection.” Banks also offer such overdraft “services,” which cost some customers over $1,000 a year in fees.)

Basically, all the changes—those being enforced by the government, and those made by credit card companies to counter the changes enforced by the government—should reinforce a cheapskate mantra. And that is: Don’t spend more than you have. You should think of a credit card like a handy, expedient alternative to cash, not as a mini-loan operation. There are better ways to get a loan, if that’s what you really need—and chances are, you don’t really need one. If you can’t pay off your bill in time, you really shouldn’t use your card. You’re just giving money away unnecessarily—and lots of it—to banks and credit card companies.

What the changes also mean is that you’ve got to shop around to get a credit card with terms that work best for you. SmartMoney rounds up some cards with relatively low rates and decent rewards.