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What the Credit CARD Act Means for You

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Got credit card debt? If so, good news: the card issuer can no longer hike your interest rate without warning or raise rates on an existing balance. They have to send your bill at least 21 days before it’s due (up from 14 days). And each bill has to show how long it will take to pay off the balance if you make the minimum payment–and how much you’ll pay in interest if you do that. Call it the credit card equivalent of the Surgeon General’s warning.

These reforms–and many others–are due to a single new law, the Credit CARD Act, which came into effect last month. Great! Who hasn’t been surprised by one or more of these practices?

“This new law is good, and it does stop a lot of bad things,” says Kathleen Day of the Center for Responsible Lending, a consumer watchdog group which published a handy guide to the new law. “But it doesn’t stop everything, and you know they’re going to find new ways around it.”

Why do the card issuers play these games? It’s not because they’re jerks and like watching you suffer. (That’s a side benefit.) They do it to make money. Take away these revenue streams, and the card companies aren’t going to roll over. Right now they’re rubbing their hands together and coming up with new schemes.

Let’s be like the writers on 24 who sit around coming up with hypothetical terrorist attacks, and figure out what the credit card issuers are going do next.

A crackdown on deadbeats

A deadbeat dad is one who never pays his child support on time. But to a credit card issuer, a deadbeat is just the opposite: a customer who always pays on time and therefore never pays any interest.

Interest is the single biggest chunk of credit card profits. The card issuers have always done their best to turn deadbeats into debtors. Got a pesky customer who always pays on time? Make sure their bill arrives a few days before it’s due, then, when they pay late, slap a 30 percent penalty APR on their entire balance.

The CARD Act makes it harder to pull this maneuver off: they have to send you the bill earlier, and you have to be 60 days late before they can jack your APR. But you can still blow it the old-fashioned way: occasionally pay less than the balance due.

“The house is making a bet that you will not live up to your intentions,” says Chris Farrell, author of The New Frugality and economics editor at American Public Media’s weekly radio show Marketplace Money. “If you will pay it off at the end of the month, and you can pay it off at the end of the month, and you actually have that discipline, it’s a really good deal. The strategy doesn’t work if it turns out you do it every other month.”

If you do show steely discipline and pay in full consistently, the card issuer is now likely to reward you by lowering your credit limit or canceling your account. Happy trails.

Here, have some rewards

That’s not to say that reward cards are going away. In order to explain why credit card issuers love reward cards, I have to use a term that will make many of you close your browser in disgust. It’s not dirty, it’s boring: interchange fees. Although, when you think about it, it does sound kind of dirty.

When you swipe your card for a $100 purchase at Urban Outfitters, the store doesn’t receive the full amount. A few pennies go to Visa (or MasterCard or Amex). A much larger chunk, 1 to 3 percent, goes to the bank that issued the credit card. This is the interchange fee.

The interchange fee isn’t the same on all transactions. It depends on a lot of factors, one of which is whether you’re using a reward card: reward cards carry higher interchange fees.

So, thanks to the CARD Act, you’ll be receiving more junk mail advertising reward cards (especially if you have a high FICO score). They’re a great deal for the banks: higher interchange fees; reward cardholders charge more than the average person, to maximize the reward; and a significant percent of the rewards go unredeemed. Got some useless air miles sitting around? Join the zero-mile-high club.

Oh, they’ll surely be hiking interchange fees, too. And since merchants aren’t allowed to charge customers extra for using a credit card, everyone will pay more–even cash customers.

Fees, fees, fees

“People are going to see many more fees,” says Kathleen Day. Here are a few favorites:

  • Annual fees. The classic, and more popular than ever–especially for cardholders with low FICO scores.
  • Inactivity fees. Some banks charge you an annual fee for not using your card or not using it enough. Damned if you do, et cetera.
  • International exchange fees. As the New York Times reports, card companies charge up to 3 percent every time you make an international purchase–even if the purchase is in US dollars.

Payday…for the banks

Subprime mortgages are over. Credit card profits are down, thanks to debt-wary consumers and new laws. Even overdraft fees, a bank’s bread and butter, will be curtailed later this year. What’s a poor bank to do?

How about payday lending? As BusinessWeek reports:

Banks including Cincinnati-based Fifth Third Bancorp, San Francisco-based Wells Fargo & Co., the fourth-largest U.S. bank, and U.S. Bancorp, based in Minneapolis, are already making such loans, usually from $100 to $500, at annual rates of 120 percent if repaid in 30 days. They’re known as “checking advance products.” That puts them in competition with so-called payday loan stores.

Lovely.

Opt out

In short, the CARD Act is good news, but credit card issuers still want to stick their hands far enough into your pockets to untie your shoes. What to do?

“Reward companies that provide a good service at a good price, and don’t do business with the ones who don’t,” says Farrell. “I hope credit unions and community development banks, which offer credit card products that are pretty simple and straightforward, take market share away” from the big banks. My credit union offers a simple, no-fee credit card at a competitive rate, but I don’t actually carry it. I did, however, sign up for their overdraft line of credit. If I ever were to need emergency cash–up to $1000–I can dip into the line of credit at a fixed 8.9 percent APR using my debit card. There’s no additional overdraft charge. (I’ve never used it.) The watchword with credit cards is the same as it ever was: check your statement for surprises and your back for knives.