Monday, May 7, 2012

Credit card rules will help consumers, but ...

NEW YORK — Help is on the way for credit cardholders this weekend.
The final stage of consumer protections signed into law earlier this year go into effect Aug. 22. Yet they only curb select practices; other fees and charges still abound.
A look at the new safeguards, and how cardholders can still get burned.
Penalty fees
New protection: Fees for late payments and other transgressions will be capped to the amount of the violation, up to $25. Previously, these fees were often between $35 and $39 regardless of how much was owed. Also, a single violation can no longer result in more than one fee.
Gaps to watch: Technically, there isn't an outright ban on penalty fees higher than $25. Banks that want to impose a higher fee simply need to give regulators justification for doing so. For example, a bank might provide an analysis showing that the costs associated with late payments average out to $30 per violation, said Lauren Bowne, an attorney with Consumers Union in San Francisco.
It's too early to tell whether banks will pursue this route, but the door is open.
Another exception to the $25 cap is if a customer repeats the violation within six months. Then the cap rises to $35.
Also keep in mind that the rule applies specifically to penalty fees. There aren't any caps on other charges. And not surprisingly, many issuers hiked fees for balance transfers, foreign transactions and cash advances in the past year.
Rate hikes
New protection: Banks must review a rate hike every six months to decide whether the increase is still warranted. If the factors that prompted the hike are no longer applicable, the rate must be lowered.
This rule applies to hikes dating back to Jan. 1 of last year, when banks began raising rates in anticipation of the new regulations.
Gaps to watch: Even if a bank finds that a rate should be lowered, the reduction doesn't have to restore the prior interest rate. So even if a rate was increased 10 percent, a review could result in a 1 percent scaleback.
Banks also have some wiggle room in the factors they use to conduct reviews. They can either base a review on the original reason for the rate hike, such as market conditions. Or they can determine whether the rate is in line with their current interest rates for new customers.
That leeway means rate hike reviews likely won't bring consumers too much relief, said Bowne of Consumers Union.
Also note that such reviews are not required for cards with variable rates, which rise and fall with a certain benchmark, such as the prime rate.
Inactivity fees 
New protection:
 These fees will be banned regardless of how they're dressed up. For example, an annual fee that's waived if a customer spends a certain amount is still an inactivity fee.
Gap to watch: There's still a reason to keep a card active, even if by making a small purchase here and there: Banks can still close inactive accounts. That could hurt your credit score depending on how long you've had the account and your broader financial standing.
This happened to many customers during the credit crunch, as card issuers looked to limit their exposure to risk by closing unprofitable accounts.

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