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.
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 AmericaCorp. 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.
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.
Inactivity Fees ReturnAs expected, issuers also are raising basic fees in the wake of the Card Act, in some cases significantly. Many credit-card companies, for example, are increasing their balance-transfer charges sharply. "We are seeing an increase across the board in fees because card companies are sensitive about their ability to price for risk," says Mr. Robertson of the Nilson Report.
Last June, for example, J.P. Morgan's Chase unit alerted customers that its maximum balance-transfer fee was rising to 5% from 2% on a wide range of its cards.
"In a higher-loss environment, it's important that we are prudent with our balance-transfer offers," says Stephanie Jacobson, a spokeswoman for the bank. She adds that "We often do have lower rates in a competitive marketplace."
Companies are raising their minimum finance charges, too. Before the Card Act, the average minimum monthly finance charge was about 50 cents, according to Nick Bourke, director of the Safe Credit Card Project at Pew. Now, he says, those fees can reach $1.50.
That difference might not seem like a lot, but it adds up: Borrowers pay $430 million a year in minimum-finance charges alone, according to the Center for Responsible Lending.
The Card Act's provisions are being implemented in stages, with the last phase taking effect on Aug. 22. After that, issuers will no longer be able to charge "inactivity fees," or extra charges for people who don't spend a certain amount each year.
So companies are dressing them up in other ways.
Citigroup, for example, has started charging some of its customers an annual fee, which can be waived if a customer's card activity exceeds $2,400 a year.
Tristan Denyer of San Francisco says he was surprised when he got a notice that Citigroup was instituting a $60 annual fee on his card. Mr. Denyer, 37, a senior Web designer, says he rarely carried a balance on his card, and refused to rack up the $2,400 in charges necessary to erase the fee.
"I figured this was just a tactic to get me to spend more and give them more money," Mr. Denyer says. He says he decided to close his account.
Citigroup's Mr. Wang acknowledges that Card Act rules forbid the waiving of annual fees based on "a customer's annual spending on the card." He adds, however, that "the rules will not prohibit cash-back rewards or similar incentives that encourage account usage."
Another potential trap: low-credit-limit cards, which are popular among college students.
The Card Act says a card's total annual fees can't exceed 25% of a borrower's credit line. But some issuers may be evading the fee restrictions by charging an upfront processing fee that doesn't fall under the 25% cap.
First Premier Bank, headquartered in Sioux Falls, S.D., offers several low-credit-limit cards. Its Centennial card comes with a $300 limit and a $95 upfront processing fee.
Melinda Robinson of Lorena, Texas, learned firsthand how rapidly fees could eat into her credit limit. After receiving a card with a $250 credit limit from First Premier, she says, she was immediately charged $170 in combined fees. When she tried to use the card for the first time, she exceeded her credit limit, triggering more fees.
"When they first send you the card, they automatically charge you fees that eat up half of it," says Ms. Robinson.
First Premier Bank's president and chief executive, Miles Beacom, says the $95 processing fee doesn't violate the Card Act because it is assessed before the account is opened. He adds that the fee offsets the risk associated with offering these cards to "high-risk individuals."
Foreign-transaction fees are on the march as well. The average fee for foreign transactions has jumped to 3% of the transaction from roughly 2% in 2008, according to Ben Woolsey, director of marketing and consumer research at Creditcards.com.
Some card holders are finding they don't even need to leave their living room to get hit with a foreign-transaction fee. Ruth Ann Sando, a small-business owner in Washington, says she has been burned repeatedly on her Visa card issued by Pentagon Federal Credit Union, the third-largest credit union in the U.S.
Ms. Sando used to do a lot of business with AbeBooks, an online retailer. But she found that she was getting hit with foreign-transaction fees even though her purchases were in dollars. That is because while the seller and shipper were based in the U.S., Abe, headquartered in Canada, provides the forum for book sellers and collects a portion of the proceeds from all sales.
So late last year, Ms. Sando says, she decided to stop buying from the site altogether. "Not buying books is the only way I can protest the fee," she says.
Pentagon Federal Credit Union says some of its cards carry a foreign-transaction fee of 2% of the U.S. dollar amount of the transaction.
Fighting BackWhile the credit-card landscape may seem littered with landmines, there are ways to guard against some of the worst pitfalls. The first and simplest: Make your card payments on time.
Second, say consumer advocates, people should dispute fees directly with the issuer when they believe something is amiss.
"Cardholders would be surprised at how much they can raise hell and get a change," says Mr. Condon, who says he immediately contacted Discover after the late charge appeared on his statement.
They might have to make repeated calls, however.
"While the Credit Card Act did make great strides in protecting consumers, it in no way closed all avenues for cardholders to get hit with fees," says Ms. Wu, from the National Consumer Law Center. "It's a first step."