Credit Card Reform: Good Riddance to Retroactive Rate Hikes

There’s a good deal missing from the landmark Credit CARD Act taking effect today: Card issuers can still raise your rates on future transactions; impose or raise certain fees; cut your limit or close your account with the proper advance notice.

What they mainly can’t do is hike the rates on existing balances.

The ban on retroactive rate increases is at the heart of the reform laws signed by President Obama nine months ago.

For U.S. consumers who now carry on average a household credit card debt of about $10,000, it marks some peace of mind.

Moreover, for those seeking new credit cards starting today, they will enjoy 12 months of no rate hikes, except for the standard, pre-disclosed rate that may follow an introductory APR.   The new laws also spell the end of “universal default” on existing balances — the practice of raising rates because a consumer was late in paying other creditors.

“I urge consumers to learn more about these significant new protections, and keep a close eye on their credit card statements,” said Sen. Christopher Dodd, D-Connecticut, chairman of the Senate banking committee and the chief author of the Credit CARD Act.  “Make sure credit card companies are giving you 45 days notice if they’re going to change your terms. If you don’t like the new terms, shop around for a better deal and exercise your new right to opt-out of the changes.”

Chase, the nation’s largest general-purpose credit card issuer has warned that it may lose as much as $750 million this year from the impact of the reform laws. In total, the industry may take a hit of $10 billion, according to some estimates.

But don’t go looking for much sympathy from card users or consumer advocacy groups that have been chronicling the moves of the big card issuers since May.

The major card issuers mailed nearly 400 million offers in the fourth quarter of 2009 – a 46 percent increase from the previous quarter, said the firm Synovate. But they have not done much to warm up to existing customers during the nine-month “grace period” since the law’s signing. Quite the opposite.

Pro-reform legislators and consumer advocates have been at odds with the Federal Reserve, urging the chief credit card regulator to go further in its rule-making.

They have decried the pre-Feb. 22 practices of the card issuers. Those practices include the raising of interest rates on existing customers, re-introducing annual fees or raising existing fees, cutting credit limits or the outright closing of accounts deemed too inactive or risky.

Card issuers have also strategically shifted customers from variable rates tied to an index to fixed rates, or the reverse.

“After months of jacking up interest rates on money consumers already borrowed, the party is over for credit card companies,” said Pam Banks, Policy Counsel for Consumers Union, the nonprofit publisher of Consumer Reports. “These new rules will put an end to some of the most abusive credit card lending practices that have trapped millions of Americans in debt and made it harder for them to make ends meet. Consumers still need to be on the lookout for unfair practices, but this new law is a big step forward.”

In the coming months, the Fed will issue a final rule that defines “reasonable and proportional” penalty fees, according to its mandate under the Credit CARD Act. It has until August to do so. But “reasonable and proportional” is vague and open for interpretation by card issuers, consumer advocates have argued.

How the Fed defines the term may help bolster credit card reform further. Anything less will continue to draw the wrath of consumer groups and lawmakers.

“We’re going to be looking at what other steps that they may take to engage in practices that would once again abuse the relationship with people that hold their cards,” Dodd told the Hartford Courant newspaper. 

Here are the major provisions of the Credit CARD Act of 2009, most of which take effect today.

Interest Rates

  • Generally, any increase in a credit card’s interest rate is prohibited in the first year of an agreement between card issuer and consumer.
  • Generally, an increase in rates that apply to existing credit card balances is prohibited , with a few exceptions (see “Late Payments/Penalty APRs” below).
  • Universal default, the practice of raising interest rates on customers if they are late paying an unrelated bill, such as a car loan or a utility bill, will be prohibited for existing balances.
  • The credit card company must inform a consumer 45 days ahead of an increase in the interest rate, change in fees, or other significant changes in the terms of the account.
  • If your credit card company is going to make any of these changes to the terms of your card, it must give you the option to cancel the card before the increases take effect. If you take that option, however, your credit card company may close your account and increase your monthly payment until the accout is paid off.
  • Interest-rate increase prohibitions DO NOT apply to variable interest rates tied to an index; your rate can go up whenever the index goes up.

Exceptions to Ban on Retroactive Interest Rate Increases

  • Credit card issuers are prohibited from applying increased annual percentage rates and certain fees to existing credit card balances, except in the following circumstances:
    (1) when a temporary or introductory rate – lasting at least six months – expires;
    (2) when the rate is increased due to the operation of an index – a variable rate;
    (3) when the minimum payment has not been received within 60 days after the due date; and
    (4) when the consumer successfully completes or fails to comply with the terms of a workout arrangement.

Late Payments/Penalty APRs

  • If you are 60 days late on a payment, the card issuer can impose a higher penalty APR on outstanding balances and future transactions — as long as a notice is provided with a “clear and conspicuous” written statement of the reason for the increase.
  • The notice must clarify that the increase on the outstanding balance will terminate “not later than 6 months after the date on which it is imposed” if the credit card company receives the required minimum payments on time during that period.
  • Card users should keep in mind that the penalty APRs can remain in place for “future transactions” following the imposition of the penalty APR even after compliance during the six-month period.


  • Credit card companies are required to obtain permission from the consumer before charging fees for transactions that exceed the credit limit.
  • If a consumer “opts-in” to allowing transactions that go over the credit limit, your credit card company can impose only one fee per billing cycle. The opt-in can be revoked at any time.
  • If your credit card company requires you to pay fees (such as an annual fee or application fee), those fees cannot total more than 25 percent of the initial credit limit. For example, if your initial credit limit is $500, the fees for the first year cannot be more than $125. This limit does not apply to penalty fees, such as penalties for late payments.

Allocation of Payments

  • If you make more than the minimum payment, the credit card company must apply the excess amount to the balance with the highest interest rate.
  • If you made a purchase under a deferred interest plan (for example, “no interest if paid in full by February 2012″), you must be allowed to choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, the credit card company must apply your entire payment to the deferred interest-rate balance first for two billing cycles prior to the end of the deferred interest period.

Payment Dates and Times

  • You must be mailed or delivered your credit card bill at least 21 days before your payment is due.
  • The due date should be the same date each month, and the payment cut-off cannot be earlier than 5 p.m. on the due date. If your payment due date is on a weekend or holiday, you must have until the following business day to pay.

Monthly Statements

  • Your monthly credit card bill must give you a rundown on how long it will take you to pay off your balance if you only make minimum payments. It will also tell you how much you would need to pay each month in order to pay off your balance in three years.

Under-Age Consumers

  • Issuers are prohibited from providing a credit card to a consumer who is younger than the age of 21, unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so.
  • A cosigner must agree in writing to any credit limit increase.
  • Card issuers are prohibited from offering free gifts in exchange for credit card applications on college campuses.

The Fed has provided a new online publication on most of the new provisions: “What You Need to Know: New Credit Card Rules

J. Lipsky

Hello, I am John, born in Cedar Rapids, but lived a lot of years in Latin America. I am an economist and have specialized in credit and debt. Originally sovereign debt, but later on, in credit score management and debt consolidation. I write for many publications. Here in eCreditDaily, I write about credit, second chance banking, and debt. I also write for other websites and bulletins about inflation and country risk.

Featured Articles