Most of the provisions of the Credit CARD Act of 2009 go into effect on February 22. Card issuers are adapting in various ways. I’ve previously written about the 79.9% APR (used to get around the limit on up-front fees for subprime cards). Now one of our readers has written in about an even more clever gimmick.
Here’s the letter:
Section 171 of the CARD Act (detailed guide here) prohibits “hair-trigger” increases in credit card interest rates on outstanding balances, whereby an issuer could increase a rate for any reason at any time. 171(b) specifies how interest rates can be changed; for example, the rate can change as the index it is based on changes, or the rate can change at the end of a clearly defined introductory period. 171(b)(4) says that if a borrower misses a minimum payment, the issuer has to wait sixty days before raising the interest rate. 171(b)(4)(B) says that after raising the rate, if the borrower makes the minimum payments for the next six months, the issuer has to restore the previous rate.
The person who got the letter above used to have an 8.1% APR. This letter raises the APR to 29.99%. But, if he pays his balance on time, he will get a “credit” amounting to (at least) 70% of the interest amount, bringing the APR down to 8.99%. If he misses a minimum payment, he may not be eligible to continue in the program. In other words, he has an 8.99% APR that jumps to 29.99% immediately (retroactively, actually, since it can apply to the previous month’s balance) if he misses a payment. Furthermore, the 8.99% rate does not have to be restored after six months of making payments, because the official rate was always 29.99%, and the 70% credit is just a “program.”
This attempt to get around Congress’s clear legislative intent is so transparent that it should be an easy case for the appropriate regulator to strike down. I believe the appropriate regulator for this kind of thing is the Federal Reserve. Maybe Ben Bernanke can show that he’s serious about consumer protection.
By James Kwak