New credit-card rules, designed to curb the industry's abusive practices, went into effect a few weeks ago. But already lenders have found ways to get around the regulatory roadblocks—moves that may cost consumers in the end. Says Gwenn Bézard, head of research at consultant Aite Group: "The industry was against the spirit of the act."
The reforms are sweeping. The Credit Card Accountability, Responsibility & Disclosure Act of 2009 covers everything from billing to fees. The first wave of changes hit in late August, with another to follow early next year. For all their worries, credit-card companies may not see dramatic losses. In fact, the spate of interest rate hikes on credit cards, driven in part by the recession, may boost profits. Says Gene J. Truono, managing director at BDO Consulting: "Issuers always reinvent themselves."
Companies have already rethought rates. Under the new law, issuers can't raise them without 45 days' notice. But there's a loophole: The rules don't apply to variable-rate cards, with rates that float up and down. That's why companies are moving more consumers into such cards, whose rates are likely to soar from their record lows. Researcher Bankrate.com (RATE) estimates variable-rate cards will account for 75% of all cards this year, up from 65% in 2008.
C.D. Reimer of San Jose was switched to a variable card last month. At the same time the issuer, Barclaycards, upped his rate to 26.99% from around 16%. Reimer could have canceled the account. But the 40-year-old was laid off from his software support job and depends on plastic. Barclaycards declined to comment.
Fees have been another area of focus. Starting in February, lenders won't be able to charge consumers a penalty when they go over their credit limit. To make up for the lost revenue, issuers are coming up with a host of other penalties. Fifth Third Bank (FITB) started levying a $19 tariff if a borrower doesn't use the card for 12 months. Notes a Fifth Third spokeswoman: "The fee is used to encourage active use of accounts and to offset the increasing costs of accounts."
Targeting Those Who Pay Up Citigroup (C) and JPMorgan Chase (JPM) added annual fees to some products, targeting customers who pay off their balances. "We continue to assess the changes needed to support the extension of credit," says a Citi spokesman. Says a JPMorgan spokeswoman: "We have introduced new products that have fees, but there are defined benefits, and the consumer has the choice."
Overseas purchases may get more expensive as well. Companies regularly charge currency exchange fees, which purportedly cover the lender's cost of converting foreign currencies into dollars. But more have started imposing foreign transaction fees, a charge applied to all purchases made at companies outside the U.S., even if they're made in greenbacks, as is typical with Internet transactions.
Consumer advocates also worry that issuers will dodge marketing guidelines, which clamp down on selling cards to young adults. The rules, part of the second phase, prohibit issuers from giving out freebies to students on or near campus. But the definition of "near" is vague. Some issuers, says Lewis Mandell, a professor at the University of Washington's Foster School of Business, may set up tables a few blocks from the school. Others may hit up parents in the hope of signing up their kids. "Lending to students is profitable," says Mandell. "The companies will just utilize other methods to reach them."