Credit Card Companies Fail To Provide Full Penalty Rate Disclosures

Despite legislation to make credit card terms fair and easy-to-understand

for consumers, the new regulations have opened the door to changes that can

make cardholders “vulnerable and uninformed.”

The Pew Health Group study (entitled “Two Steps Forward: After the

Card Act, Credit Cards are Safer and More Transparent–But Challenges

Remain”) released last week analyzed and compared the credit card

marketplace before and after the CARD Act. The study reviewed

credit cards offered online by the twelve largest banks and twelve

largest credit unions–nearly 450 credit card offers.

The study shows that issuers have taken two steps forward in most

areas, but also taken a step back with penalty rates. Some issuers no

longer provide full disclosure of the terms of the penalty rate, or fail to

correctly follow disclosure requirements required by the new Federal

Reserve rules.

Before the CARD Act, credit card issuers clearly disclosed the penalty rate

and the terms in the application process because this gave them the legal

right to raise rates immediately and without notice as soon as accounts

became past due or cardholders went over their credit limit. This full

disclosure was in their best interest because increasing interest rates

generated more revenue.

After the CARD Act, the Federal Reserve added new rules for the penalty

rate. While these rules benefit cardholders, they have also allowed issuers

to withhold important pricing information which can leave cardholders

uninformed about the complete conditions of their credit card.

Here are the new rules for applying penalty rates:

* Issuers are permitted to apply an increased rate to an existing balance

when an account becomes more than 60 days delinquent. Issuers can also

increase rates to the penalty rate on new transactions any time after the

account has been open for one year.

* The cardholder must be given at least a 45-day notice before the rate is

increased.

* According to the Federal Reserve Board rules, “the credit card issuers

must disclose if the rate increase is due to the consumer’s failure to make

a minimum periodic payment within 60 days from the due date for that

payment. In those circumstances, the notice must state the reason for the

increase and disclose that the increase will cease to apply if the creditor

receives six consecutive required minimum periodic payments on or before

the payment due date, beginning with the first payment due following the

effective date of the increase.”

* These rules also say that “the notice also must state the circumstances

under which the increased rate will cease to apply to the consumer’s account

or, if applicable, that the increased rate will remain in effect for a

potentially indefinite time period. In addition, the notice must include a

statement indicating to which balances the delinquency or default rate or

penalty rate will be applied, and, if applicable, a description of any

balances to which the current rate will continue to apply as of the

effective date of the rate increase, unless a consumer fails to make a

minimum periodic payment within 60 days from the due date for that

payment.”

“The cardholder must make six on-time monthly payments that start

at the time of the penalty, or the issuer can charge the penalty rate

indefinitely,” says Bill Hardekopf, CEO of LowCards.com and

author of The Credit Card Guidebook.

* Starting on August 22, 2010, issuers must perform a review of accounts

that receive a rate increase. The review should determine if changes in key

factors (such as cardholder credit risk and market conditions) give reasons

to reduce the rate.

The application of these rules varies widely by credit card company. Here is

the terminology used by the six major issuers when describing this penalty

rate:

Chase–If an APR is increased for any of these reasons (late payment, exceed

credit limit, payment returned) the Penalty APR will apply indefinitely to

future transactions. If we do not receive any Minimum Payment within 60 days

of the date and time due, the Penalty APR will apply to all outstanding

balances and future transactions on your Account; but if we receive six

consecutive Minimum Payments when due, beginning immediately after the

increase, the Penalty APR will stop being applied to transactions that

occurred prior to or within 14 days after we provided you notice about the

APR increase. (Penalty APR is 29.99%)

American Express–If the Penalty APR is applied for any of these reasons

(late payments, returned payments), it will apply for at least 12 billing

periods in a row. It will continue to apply until after you have made timely

payments, with no returned payments, for 12 billing periods in a row.

(Penalty APR is 27.24%)

Citi–If your APR is increased for either of these reasons (late payment,

returned payment), the Penalty APR will no longer apply to existing balances

on your account if you make the next six consecutive minimum payments when

due. However, the Penalty APR may apply to new transactions indefinitely.

(Penalty APR is up to 29.99%)

Discover– If your APRs for new transactions are increased for a late

payment, the Penalty APRs may apply indefinitely.

(Editor’s Note: Discover seems to have the most reasonable penalty rate; it

is five percentage points above the non-penalty rate. The Penalty APR is

between 16.99% and 25.99% based on your creditworthiness and

other factors.)

Capital One–If APRs are increased for a payment that is more than 60 days

late, the Penalty APR will apply indefinitely unless you make the next six

consecutive minimum payments on time following the rate increase. (Penalty

APR is 29.4%)

Bank of America–If this account becomes 60 days or more past due, we may

amend the terms of the Agreement to increase all interest rates, including

interest rates on existing promotional rate balances.

According to the Pew report, altogether one in five penalty disclosures

mentioned the right way to “cure” (return to the original, non-penalty

interest rate). Only three of ten banks that use penalty rates mentioned the

legally mandated cure periods.

The Pew report points out that some issuers (Bank of America) no longer

provide the rate or terms for the penalty fee, only including a sentence in

the fine print that states they reserve the right to impose a penalty fee.

The report argues that this undermines regulations. Cardholders are entitled

to know the pricing of their account, the penalty rates that could apply,

and how high those rates could be.

The Pew Health Group recommends that the Federal Reserve bank regulators

should ensure full and reliable disclosure of credit card penalty rates

because “full disclosure is critical to the success of this policy.”

Regulators should also enforce the existing rules in Regulation Z to make

sure the penalty rate and the terms are disclosed in advanced.

It also suggests that the penalty rate should be no higher than 7% of

the regular rate.

LowCards.com ( http://www.lowcards.com ) simplifies the confusion of

shopping for credit cards. It is a free, independent website that helps

consumers easily compare credit cards in a variety of categories such as

lowest rates, rewards, rebates, balance transfers and lowest introductory

rates. It also gives an unbiased ranking and review for each card. The

LowCards.com Complete Credit Card Index

( http://www.lowcards.com/CreditCardIndex.aspx ) is the most objective

and comprehensive resource on the Internet which allows consumers to

compare rates for over 1000 credit cards offered in this country. Created by

Hampton & Associates, the company has been analyzing the credit card

industry and supplying objective websites on various consumer expenses

for ten years.

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