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Beware: Loopholes in the Credit CARD Act you need to know about

The credit card reform bill, otherwise known as the Credit CARD Act, goes into effect next month (on February 22, to be exact). While there’s a lot to be grateful for in this legislation, there are also some omissions, loopholes and flat-out giveaways to the credit card companies of which consumers need to be aware.

WalletPop talked to Lauren Bowne, an attorney with Consumers Union, the nonprofit consumer-advocacy group (and publishers of Consumer Reports). Bowne has been tracking this act as officials get ready for its launch, and she offered WalletPop readers a list of loopholes to watch out for when you use your credit cards after the CARD Act kicks in.

The bad news
There is no cap on the interest rate card companies are allowed to charge. While companies can’t hike your rates on existing balances unless you’re 60 days late with a payment, they can raise rates on future purchases any time and for any (or no) reason, warns Bowne. They do have to tell you this, but they’ll probably send it in an envelope that looks like junk mail in the hopes you’ll throw it out.

Lesson? Read everything your credit card company sends you! Issuers have to give you a 45-day warning, and a new rate can kick in as soon as two weeks after they send you that notice. If you don’t want to pay the new interest rate on future purchases, your only choice is to stop using the card (or pay your balance in full every month).

While the CARD Act has limits on the severity of penalty fees you can be charged, there’s no rule against card companies making up as many new fees as they can conjure and charging whatever they like for them. MSNBC’s Red Tape Chronicles tackled this topic in a recent post. Some issuers have already started adding annual fees to cards that didn’t used to require them, and are also adding things like fees for paper statements. Some are even adding “inactivity fees” if you don’t use your card for a long period.

Expect to see more of this in the future, experts say. (Yet another reason to read all the mail your credit card company sends you, so you can opt out or, at worst, cancel the card if you don’t want to pay the new fees.)

The Red Tape Chronicles also highlighted another area of fee creep: Card companies are allowed to — so it’s safe to assume they will — raise existing fees. The amount you pay for anything from balance transfers to cash advances has already been creeping up. Be prepared to see it rise further in the future. Again — and we can’t say this enough — read your mail. If a fee for, say, balance transfers pops up, be sure not to transfer a balance or even stop using that card.

We told you card companies can’t hike your rates on existing balances. That’s true as long as you have a fixed-rate card instead of a variable rate card, says Bowne, and that is a loophole big enough to drive an armored truck through. This is the reason why card issuers have been switching people to variable-rate cards as fast as they can print out and mail the notices.

Right now, most variable rates are in line with or maybe even a little lower than the fixed rates users were paying before. This is because the “variable” part of the variable rate, called the prime rate, is at a historic low because the government is keeping interest rates very low. Translation: When the Federal Reserve raises interest rates — which most experts think will happen in about a year, give or take — to prevent inflation, your interest rate’s going to rise, too. Our best advice? Pay those balances down as soon as possible to avoid paying more when interest rates go up.

While issuers have to give you 45 days’ notice before making most kinds of changes to your account (such as raising rates), there are two important exceptions, Bowne says: Your card company can lower your credit limit or close your card without giving you any warning at all. So what’s a consumer to do?

Your best move in this case would be to call the issuer, ask why they made the change and see if they’ll reverse it. If not, it’s a good idea to pay down that balance as fast as possible, since a lowered limit can impact your credit score by skewing your utilization ratio. Bowne says issuers tend to close cards that are inactive or aren’t used very often. However, if you find yourself with a closed card that has a balance on it, it’s in your best interest to pay that off as fast as possible, since the issuer will likely report that balance as the credit limit, making it look as if you’ve maxed out your spending.


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