Earlier this year in February 2010, Credit Card Accountability, Responsibility and Disclosure Act (CARD) of 2009 took effect. The law was supposed to be a a consumer friendly piece of legislation that aimed to put some limits on what the credit card companies could do in regards to charging exorbitant fees, upping interest rates with no reason, in the end was supposed to force them to be more transparent with their customers.
For a few months at least the outcomes seemed to be headed in the right direction, but now the credit card companies have started finding new ways to make up their lost revenues.
Credit Card Companies Find Revenue In New Places
Even though they have been forced to stop some controversial billing practices due to the 2009 CARD act, the credit card companies seem to still be one step ahead of the law. They've found new ways to make money:
Whomever President Barack Obama taps to head the new Bureau of Consumer Financial Protection could find it difficult to keep ahead of the credit-card industry … some of the biggest card issuers in the U.S., including Citigroup Inc., J.P. Morgan Chase & Co. and Discover Financial Services, are already rolling out a slew of fees designed to recapture some of their lost income, in part by skirting the new rules. Some banks may even be violating the law outright, say consumer advocates.
“Card companies are figuring out how to replace old fees with new ones,” says Victor Stango, an associate economist with the Federal Reserve Bank of Chicago and a professor at the University of California, Davis, who has been analyzing how the Card Act will affect consumer banking. “It's a race between regulators writing ever-more-complex laws and credit-card companies setting up ever-more-complex fees.”
The banks have a big gap to fill. The Card Act is expected to wipe out about $390 million a year in fee revenue, according to David Robertson, the publisher of industry newsletter Nilson Report. On July 16, during its second-quarter earnings call with analysts, Bank of America Corp. Chief Financial Officer Charles Noski warned that the Card Act and other regulatory changes would prompt the bank, the nation's largest in assets, to write off up to $10 billion in the third quarter.
“If you have every major issuer saying that we are losing our shirt, then that speaks volumes,” Mr. Robertson says. “Proportionately, these fees should be understood as almost inconsequential compared to the losses.”
So the banks are getting aggressive. According to a July 22 report from Pew Charitable Trusts, a nonpartisan research group, the industry's median annual fee on bank credit cards jumped 18% to $59 between July 2009 and March 2010. At credit unions, annual fees soared 67% to $25. During the same period, the median cash-advance and balance-transfer fees jumped by 33%.
The credit card companies are losing a ton of revenue because of the new laws, and now they're doing what they can to make up those revenues. They're charging higher annual fees for the cards, cash advance and balance transfer fees are going up and credit unions have had to raise their rates.
All of these increases are perfectly legal, of course. Banks and other issuers would have a difficult time extending credit to consumers, even at high interest rates, if they couldn't augment those revenues with fee income. “We're coming out of a deep recession that issuers are still working through,” says Peter Garuccio, a spokesman for the American Bankers Association.
We understand that the banks have to make money. But some of the banks are going a bit too far, and are doing things that are now illegal, or at least a bit iffy – under the 2009 credit card law.
some banks may be going too far. In a July 7 letter to the Office of the Comptroller of the Currency, which regulates many of the biggest U.S. banks, a coalition of consumer groups including the National Consumer Law Center, the Consumer Federation of America and Consumer Action flagged several “potential violations of the Credit Card Act.”
Other banks are ramping up their marketing of so-called professional cards. These are like corporate cards but can carry the same terms as consumer cards—and aren't covered under the new law. In the first quarter of this year, issuers sent out 47 million professional-card offers to U.S. households, up from 13.2 million in the corresponding period last year, according to research firm Synovate.
“This can be a very easy way around the Card Act,” says Josh Frank, a senior researcher at the Center for Responsible Lending, a consumer group.
The upshot: Borrowers must be more vigilant than ever—even before they make their first charge on a new credit card.
Other Ways To Get Revenue
Other things that the banks have been doing that seem the skirt the edge of legal and illegal?
- Playing fast and loose with late payment fees and payment deadlines: the Card Act stipulates that late-payment fees shouldn't be triggered on a Sunday or holiday, when there is no mail delivery, however, some banks are saying that because they accept payments 7 days a week online, that they are in compliance with the Card act.
- Rebate cards allow banks to jack up rates: These types of credit cards find the credit card companies offering to refund up to 70% of finance charges if a customer pays on time. Problem is that rebate offers aren't governed by the Card act, so the companies can revoke the card or hit the cardholder with high charges at any time.
- Shortening the billing cycle: Despite the requirement of the Card act that companies provide a window of at least 21 days from when a statement is mailed to when a payment is due, some consumers are alleging that their billing cycles have been shortened to fewer than 21 days.
Credit Card Companies Aren't Your Friend. Be Wary.
Credit card companies are for profit entities, and as such they're usually going to find as many ways as they can, and as many instruments as they can to make money. The credit card companies are not your friend, and if you think they've got your best interests in mind, you've got another think coming. They only want to get their hands on as much of your money as they can.
When signing up for a credit card, remember that if it isn't used correctly, it can lead you down a road to debt, bankruptcy and foreclosure – so be careful. And remember, the best way to live is to live with a cash only mindset!
What do you think about the new ways the credit card companies are trying to make money? Does it surprise you? Is it to be expected? Tell us your thoughts in the comments.