Credit Cards Find New Ways to Gouge Customers

It seems that the tale of their demise has been greatly exaggerated. The tale, of course, relates to predatory practices by credit card companies.

Many were hopeful that the Credit Card Act of 2009 would finally put an end to the abusive tactics of card issuers. Some methods used to garner fees seem down right criminal, and an Act of Congress was needed to stop them. But, like adage goes about plucking a grey hair, you take one out, and two more sprout back up in its place.

In the past year, card issues have created new ways to collect millions more in fees each year, many of which are hidden to consumers, unless you pore over your credit card statement.

Joshua M. Frank, a senior researcher with the Center for Responsible Lending commented “Credit card issuers are going to more than ever try to find ways to make extra profits. New charges and changes to the way fees are calculated are adding to the balances of a growing number of cardholders. While some of the practices were instituted after the Credit CARD Act was approved in May, others were quietly being put in place earlier as a result of the recession. The one thing they have in common is that none of them are explicitly prohibited by the Credit CARD Act.”

Under the Credit Card act, consumers with fixed rate credit cards will not have rates changed on current balances if they pay on time – but, the majority of cardholders carry variable rate cars, which could leave them exposed to risk of a rate increase. The rate on these cards is usually calculated by taking the prime rate, and then adding to it a risk spread. Historically, the prime rate used was the highest in the month. However, many issuers have amended their terms this year, so they can now select the highest prime rate in the previous 90 day cycle, which the Center estimates can cost consumers $720 million a year. Frank adds “It’s so hidden and obscure that it can’t be interpreted as anything other than a way to extract money from people in ways they don’t understand.”

In addition, although historically the rate on cards floated freely with the prime rate, many issuers have now set “floors”, to limit how low a cardholder’s variable rate can go. Ultimately, what we’re seeing here is that the legislation may have the best intentions of the consumers in mind, but it lacks the breadth necessary to offer any real protection. The major of customers are still exposed to unexplained rate increases, and fees that they just will not understand.