The Unintended Consequences
of the Credit CARD Act

Home Money Credit Understanding The Unintended Consequences of the Credit CARD Act

The major provisions of the Credit CARD Act have taken effect. Many of these provisions will have a very positive effect on consumers, but the law has resulted in some unexpected fallout.

The Credit CARD Act has some very significant benefits for credit cardholders. The restrictions on interest rate hikes and the ban on over-the-limit fees are tremendous. Consumers have cried out for these protections for years and they are finally about to take effect. However, there are a number of unintended consequences that have resulted from the Credit CARD Act. These changes might affect more credit card consumers than the law helped.

Here is a look at some of the unintended consequences of the Credit CARD Act:

• Since issuers will be unable to raise interest rates on new accounts for twelve months, they simply raised the advertised APR before February 22 so it affected everyone shopping for a new credit card account. According to the LowCards.com Complete Credit Card Index, the advertised Annual Percentage Rates for credit cards averaged 13.46% last week. Six months ago, the average was 12.11%. One year ago, the average was 11.51%.
  
  
• People under 21 will find it harder to build up their credit score. If they do not have a job with enough income, they must get an adult to co-sign. Many young adults will not take this extra step, losing out on the opportunity to build up a good credit history throughout college. Without a positive credit history, they may not receive as good an interest rate on their first house or car loan.
  
  
• Fees, fees and more fees. Issuers are introducing more cards with annual fees, increasing existing fees, and putting new fees on accounts. Last October, Bank of America notified a small percentage of their customers that it is adding an annual fee of $29 to $99 on their accounts beginning in February. Balance transfer fees, which had been at 3% for most issuers, have now been increased to 5% by Chase and Discover. Fifth Third Bancorp recently added a $19 inactivity fee if your card is unused for a twelve-month period.
  
  
• The scarcity of fixed rate credit cards. Most issuers switched their fixed rate cards to variable rates, since the Credit CARD Act allows APR increases in variable rate cards if the index used to calculate that variable rate increases. As an example, if the index for a variable rate card is tied to the prime rate and the prime rate increases by 1%, the APR on that card can increase 1%. Many issuers switched their fixed rate cards to variable rate cards so they could maintain their margins once the Credit CARD Act was instituted.
  
  
• Since any amount above the minimum monthly payment goes toward the balance with the highest APR, some issuers raised the minimum payment up to 5% on a number of accounts.
  
  
• A decrease in the amount of credit card rewards or cash rebates. Reduced rewards could come in several different forms: (1) a cutback in the payouts of cash back cards; (2) more miles or points needed for that free airline trip or hotel stay; or (3) higher tiers required for consumers to receive the same level of rewards.
  
  
• A decrease in the number of credit cards awarded by retail stores. Providing proof of income when applying for a credit card will make it significantly harder for consumers to instantly qualify for a credit card. This will certainly impact the marketing efforts of the 10-15% discount on a purchase if you sign up for a store's credit card. Retailers rely on this marketing strategy to increase purchases and to build their mailing list of customers used for offering future coupons or early-bird discounts.

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Bill Hardekopf is CEO of LowCards.com, a site dedicated to simplifying the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories, such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet, which allows consumers to compare rates for all 1060 credit cards offered in this country.

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• Discuss "Credit Cards for Those Under 21" with other Dollar Stretchers in The Dollar Stretcher Community.

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