WEEKEND INVESTOR JULY 31, 2010

The New Credit-Card Tricks

Just months after historic legislation banned certain billing practices, card issuers have dreamed up new ones designed to trip up consumers.

 

JESSICA SILVER-GREENBERG

The Wall Street Journal 

Whomever President Barack Obama taps to head the new Bureau of Consumer Financial Protection could find it difficult to keep ahead of the credit-card industry.

The Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the Card Act, was intended to reshape the contours of consumer finance. Among other things, it forces card issuers to give customers more notice about interest-rate increases and restricts certain controversial billing practices such as inactivity fees.

Bloomberg News The Card Act forces issuers to give customers more notice about interest-rate increases, and restricts certain controversial billing practices such as inactivity fees.

Yet some of the biggest card issuers in the U.S., including Citigroup Inc., J.P. Morgan Chase & Co. and Discover Financial Services, are already rolling out a slew of fees designed to recapture some of their lost income, in part by skirting the new rules. Some banks may even be violating the law outright, say consumer advocates.

"Card companies are figuring out how to replace old fees with new ones," says Victor Stango, an associate economist with the Federal Reserve Bank of Chicago and a professor at the University of California, Davis, who has been analyzing how the Card Act will affect consumer banking. "It's a race between regulators writing ever-more-complex laws and credit-card companies setting up ever-more-complex fees." 

The banks have a big gap to fill. The Card Act is expected to wipe out about $390 million a year in fee revenue, according to David Robertson, the publisher of industry newsletter Nilson Report. On July 16, during its second-quarter earnings call with analysts, Bank of America Corp. Chief Financial Officer Charles Noski warned that the Card Act and other regulatory changes would prompt the bank, the nation's largest in assets, to write off up to $10 billion in the third quarter. 

"If you have every major issuer saying that we are losing our shirt, then that speaks volumes," Mr. Robertson says. "Proportionately, these fees should be understood as almost inconsequential compared to the losses." 

So the banks are getting aggressive. According to a July 22 report from Pew Charitable Trusts, a nonpartisan research group, the industry's median annual fee on bank credit cards jumped 18% to $59 between July 2009 and March 2010. At credit unions, annual fees soared 67% to $25. During the same period, the median cash-advance and balance-transfer fees jumped by 33%. 

All of these increases are perfectly legal, of course. Banks and other issuers would have a difficult time extending credit to consumers, even at high interest rates, if they couldn't augment those revenues with fee income. "We're coming out of a deep recession that issuers are still working through," says Peter Garuccio, a spokesman for the American Bankers Association. 

But some banks may be going too far. In a July 7 letter to the Office of the Comptroller of the Currency, which regulates many of the biggest U.S. banks, a coalition of consumer groups including the National Consumer Law Center, the Consumer Federation of America and Consumer Action flagged several "potential violations of the Credit Card Act." 

Other banks are ramping up their marketing of so-called professional cards. These are like corporate cards but can carry the same terms as consumer cards—and aren't covered under the new law. In the first quarter of this year, issuers sent out 47 million professional-card offers to U.S. households, up from 13.2 million in the corresponding period last year, according to research firm Synovate. 

"This can be a very easy way around the Card Act," says Josh Frank, a senior researcher at the Center for Responsible Lending, a consumer group. 

The upshot: Borrowers must be more vigilant than ever—even before they make their first charge on a new credit card. 

'Saddled With Late Fees'

Alan Condon of Woodstock, Ga., says he carefully reviews his card statements each month, and even read the Card Act—all 33 pages—after it was passed in May 2009.

Josh D. Weiss for The Wall Street Journal Alan Condon, a self-employed computer programmer in Woodstock, Ga., is one of many who was hit with a fee that was made illegal upon by the Card Act. 

Among other things, the Card Act stipulates that late-payment fees shouldn't be triggered on a Sunday or holiday, when there is no mail delivery. 

The rule "is clearly meant to offer cardholders some semblance of relief so that they don't get saddled with late fees for making a reasonable payment on the next business day," says Chi Chi Wu, a consumer credit lawyer at the National Consumer Law Center. 

Mr. Condon says he was shocked when he opened his credit-card statement dated June 18 and saw that Discover had charged him $39 for a late payment—and had upped his interest rate on future purchases from 17% to 24.99%. He says the company considered him late because he paid on June 14, instead of June 13, a Sunday.

"I just got mad," says the 56-year-old computer-software developer, who says he had never before been late on a Discover payment.

"We were in compliance with the Card Act," says Discover spokesman Matthew Towson. "The law states that if a creditor does not receive or accept payments on weekends or holidays, then the date is extended. But we accept payments seven days a week." 

Nevertheless, Discover reviewed Mr. Condon's account at The Wall Street Journal's request and decided to waive the late fee and reduce Mr. Condon's interest rate to its earlier level.

The Card Act also stipulates that issuers can't jack up rates on existing balances unless a cardholder is at least 60 days late. But there is a creative maneuver around that: the so-called rebate card. 

Citibank rolled out rebate-card offers to some of its customers last fall, offering to refund up to 70% of finance charges when customers pay on time. The problem: Rebate offers aren't governed by the Card Act, and an issuer can revoke them suddenly and hit cardholders with high charges.

The net result is the same as raising rates—and because it is perfectly legal, customers have little recourse. "Rebates on finance payments may seem like a good deal, but you could end up with a very high interest rate suddenly," says Mr. Frank, of the Center for Responsible Lending. 

"The rebate offer is clear, transparent, and we believe fully within the spirit of the Card Act," says Citigroup spokesman Samuel Wang. 

Shortening the billing cycle is another new tactic some banks may be using. The Card Act requires companies to provide a window of at least 21 days from when a statement is mailed and when payment is due. 

Yet the National Consumer Law Center and Consumer Action say they have received complaints from borrowers who allege that their billing cycles have been shortened to fewer than 21 days.

"Since the passage of the act, we've heard from numerous borrowers alleging that they are shortchanged on billing cycle time," says Joe Ridout, a consumer-services manager at Consumer Action.