Loopholes in the CARD Act

Although Congress passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act in May of 2009, which prohibited credit card companies from arbitrarily raising rates, and requires that credit card companies give 45 days notice before a rate hike, you may have noticed that many credit card rates have continued to increase since then. This is because there are several loopholes in the CARD Act which credit card providers take advantage of. By knowing a bit more about this law and its loopholes, you can be in a better position to ensure that you get the best possible credit card rates.

For example, while companies are not permitted to raise the interest rates on credit cards, some Chase cards simply raise the minimum payments; in one case, from 2 percent up to 5 percent of the card holder's balance. While this action may seem to go against the spirit of the CARD Act, it is technically legal.

The CARD Act also prohibits raising interest rates in response to late payments, so Citibank actually increased some customer's rates before payments were late, and then offered partial refunds for making the payments on time.

High processing fees and annual fees, coupled with low spending limits, have become the norm for many people getting a new credit card. Since these charges do not actually impact the interest rate on the cards, they stay within the confines of the CARD Act, even though banks may be using these high charges in order to pass on certain transaction costs to the consumer.

Additionally, the CARD Act states that only amounts paid in excess of the monthly minimum payment must be put toward paying off balances with the highest interest rates. This means that the credit card issuer will often apply the minimum payment solely to the balance with the lowest interest rate, thus maximizing the amount of interest they earn each month, but this practice can make it difficult for consumers to pay off their debt if they can only meet minimum payments.

So the next time you apply for a credit card, remember that while the CARD Act is in place to protect consumers, you will want to do as much research as possible in order to ensure that you do not end up with a card that has unanticipated drawbacks.

-Seth Berger