High rates, more fees -- credit card traps here to stay

By Blake Ellis, staff reporter

NEW YORK (CNNMoney.com) -- More rules clamping down on abusive credit card practices are on their way.

But even when the final phase of the CARD Act is in place this August, credit card issuers will still be able to blindside customers with unexpected fees.

The CARD Act, signed into law last year, aims to protect consumers by limiting fees, preventing over-the-top interest rate hikes and improving disclosure.

Rules that have already been rolled out require credit card companies to give customers at least 21 days to pay their bills and to provide a 45-day notice of major changes.

In addition, credit card companies can no longer automatically apply fees to card holders who exceed their credit limit, and issuers can't raise interest rates on existing balances unless a payment is 60 days late.

Beginning Aug. 22, your credit card company won't be able to charge you inactivity fees or excessive late fees, and it will only be allowed to charge you one penalty fee at a time.

That's the good news.

But banks will still be able to get around many of these rules.

"The Card Act has provided a lot of relief and stopped some of the very worst practices," said Gerri Detweiler, personal finance advisor at Credit.com. "But there are still going to be a lot of people out there thinking that the rules didn't help them at all."

Hiking interest rates: If you make all your monthly payments on time, that 15.99% rate on your existing balance is safe.

But for that giant flat-screen TV you're thinking about buying, watch out: The rate on future balances can skyrocket -- hello 29.99% -- as long as your credit card company warns you 45 days ahead of time, and you've had the card for more than a year.

That's for fixed-rate cards. With variable versions, you can face higher rates in two ways.

First, your card is likely tied to an interest-rate benchmark, say, a few points above the prime rate. If the benchmark goes up, so will your card's rate.

Second, the card company can raise the margin above that benchmark, as long as it tells you 45 days in advance.

Don't be surprised if you're suddenly switched from a fixed- to a variable-rate card -- that's happening more and more, and it's legit as long as you get a heads-up.

"One of the biggest misconceptions people have about the Card Act is that issuers can't raise interest rates anymore," said Beverly Harzog, contributing editor at CardRating.com. "But they actually can do what they want on new balances, as long as they give 45 days notice."

You should also expect higher initial rates, said Dennis Moroney, a research director at financial services consulting firm TowerGroup.

They currently average about 14% and have increased more than 2 points in the past 12 months. The average rate could climb to 16% later this year, said Moroney.

"They're going to want to do what's in the best interest of their customers," said Peter Garuccio, a spokesman for American Bankers Association. "But there's nothing in the CARD Act that prohibits the raising of rates on future balances."

Slashing credit limits and closing accounts: Banks can still cut your credit limit by as much as they want and close an account without advance notice.

Avery Cofield-Walsh of Stone Mountain, Ga., said he was shocked when he checked his balance a year ago and saw that his credit limit had been cut to $500 from $4,000 after a "routine evaluation" of his account.

"This was the only line of credit I used for my business and I always paid my balance off in full each time I used the card," he said. "I always thought people should be rewarded for using their credit card responsibly, not penalized."

Even with the slew of new rules in place, consumers shouldn't expect much of a change.

"Things like this can definitely still happen now," said Greg McBride, a senior financial analyst at Bankrate.com. "Even after all the rules, card issuers are going to retain the ability to cut credit limits and close credit cards, both of which can have a very negative impact on a person's credit score."

JPMorgan Chase, one of the largest credit card issuers in the United States, said it has the right to carefully decide which customers to hold on to and how much credit they deserve.

"Credit card issuers may make changes to credit limits or close accounts," said Paul Hartwick, a Chase spokesman. "As a standard operating practice, we regularly evaluate whether our customers' credit lines are appropriate for the customer and his or her needs and ability to repay, and will make adjustments accordingly."

Raising fees: The new rules cap late fees at $25 and do away with inactivity fees, but there are plenty of other ways card companies can charge you.

The number of companies charging annual fees has already increased, according to TowerGroup research.

More than 26% of issuers had annual fees in 2009, as the card act began to phase in. While this dipped to 24% in the first quarter of 2010, that's still up from 2008, when about 20% of credit offers had annual fees. (See 15 most hated fees.)

A spokeswoman confirmed that Bank of America began charging an annual fee ranging from $29 to $99 for a "very limited" group of cardholders in February, while information gathered by LowCards.com shows that other issuers have recently hiked transfer balance fees, cash advance fees and foreign transaction fees in addition to annual fees.

"We're already seeing all of this start to happen," said Credit.com's Detweiler. "The most important thing is to read the mail you get from your card issuer -- don't automatically assume its junk mail, because you're only going to have the 45 days to opt out if you actually read the fine print."

And as credit card companies become desperate, they will not only raise existing fees but will create fees, she said.

"While penalty fees are regulated and inactivity fees are banned, there is still plenty of room for new fees," said Detweiler.  To top of page

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