Beware: New credit card law has four big loopholes

Posted Oct. 05, 2009, at 12:22 a.m.

On Aug. 20, 2009, the rules of the credit card game changed when the first phase of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 became effective.

Under the first phase, you, as a credit card account holder:

• Get a fair warning. You must receive at least 45 days’ warning of changes to your credit card terms, rather than only 15 days’ notice. The notice must explain the steps that you, the cardholder, can take to exercise your rights to cancel if you don’t like the changes, including a toll-free number to call and the deadline for opting out.

• Can opt out. You have the right to pay off your balances under the old, lower interest rate if you opt out and cancel the account.

• Get time to pay. You must be allowed at least 21 days to pay your monthly credit card statements without threat of late fees and penalties.

Are you impressed? You might want to reserve judgment until you learn about the exceptions to these phase-one provisions:

• Loophole 1: You cannot opt out of minimum payment increases or credit limit decreases.

• Loophole 2: If you are 60 or more days late making payments, you lose your right to opt out of interest rate increases.

• Loophole 3: If yours is a variable-rate credit card account, your interest rate is tied to an index, which is almost always the “prime rate.” Those interest rate increases can be passed on to you with no opt-out option required. In recent months, card issuers have rebelled against this law by switching consumers from fixed-rate to variable-rate cards.

• Loophole 4: Finally, there is a significant loophole that is best explained this way: Assume that you have a credit card account at a 6.99 fixed annual percentage rate. You get a notice that your rate will increase to 18.99 APR and that you have 45 days to either accept the change or decline and close your account. You decide that you will opt out before the 45 days are up. However, you decide to spend all you can under the older, lower rate before the new APR kicks in.

That move could come back to bite you because of this loophole buried in the Credit CARD Act:

The law says the new, higher APR will apply to any purchases made 14 days after the notice is mailed. If you receive a 45-day notice, you cannot run out and start charging things in days 15 to 45, hoping to add those transactions to the lower protected balance. Under the law, banks are not required to disclose this 14-day loop-hole.

Another problem with the terms of this new law is the effect opting out will have on the cardholder’s credit score because of the negative effect of a “closed account” on a credit report.

The only thing that is clear about the new law is that it is very confusing.

Mary Hunt is the founder of www.DebtProofLiving.com and author of 18 books, including her latest, “Can I Pay My Credit Card Bill With a Credit Card?” You may e-mail her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723.

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