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The New Credit Card Accountability Responsibility and Disclosure Act takes full effect today. As I pointed out in 10  Big Changes that Affect Your Credit Cards , there are a number of provisions in the bill that mitigate the most egregious practices that credit card companies used to gouge consumers. So there is no denying that the law makes many needed changes and provides some protection to credit card holders. That said, there are a number of loopholes and omissions that makes it much less protective than it could have been. And, in making financial decisions, every consumer should be aware of the law's limitations so that they can fend for themselves against financial industry players that will take full advantage of any loopholes they can get.
No National Rate Cap:
If you have a friend that wants to charge you 14% interest for a personal loan, he's probably a loan shark. In many states, that's considered usury. But, since the early eighties, credit card companies have used a quirk in the law to circumvent the rate ceilings imposed by some states.
Ever wonder why all the banks setup credit card operations in states like South Dakota or Delaware?
When it comes to credit card agreements, the maximum interest rate depends on the state where the bank issued the card not whatever state you happen to reside in. In 1980, when interest rates were near 20%, Citibank and the state of South Dakota brokered a deal to remove the interest rate cap in exchange for relocating Citi's credit card processing center to the state. For a very interesting look at the history of credit cards, you might want to check out the report by Robin Stein @Frontline. For all practical purposes, whatever protection your state provides against usury just don't apply to credit cards - because once credit card companies realized they could beat the system by relocating their processing centers, they set up subsidiaries in the states that accomodated them. The states wanted the jobs and the banks wanted immunity from usury laws.
Perhaps the biggest flaw in this credit card 'reform act' is the failure to impose a national rate cap. The banking industry mounted a full scale campaign against a national rate cap and got their way. Let's face it - some Senators have their own private bankers and some bankers have their very own private senators. They threatened to scuttle the entire bill if it included a national cap. That omission coupled with the next loophole has created a short term disaster for many families.
Delayed Implementation:
For tens of millions of Americans, a national interest rate cap wouldn't have been an issue if the new law had become effective the day it was approved by Congress. Unfortunately, the effective date for many of the key provisions is today, a full nine months after the law passed. Credit card companies took full advantage of that nine month window to dramatically increase interest rates on existing balances on the majority of credit cards. Many banks, such as Citibank, gave their customers two options: agree to the rate increase or get it cancelled upon renewal. The delay created a huge unintended consequence: even borrowers with sterling credit scores saw their interest rates go up from reasonable to exorbitant through no fault of their own.
Before the law, profits from fees on late payments allowed the banks to offer low rates to consumers that paid on time. With the changes in the law, banks now need to squeeze more from responsible cardholders. In effect, for those that always paid on time, the law made things worse, not better. Although that should change over time as credit card issuers start to compete for responsible cardholders that have low loss rates.
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