Credit card reforms mean mailings to consumers may include big change

Senate Banking Chairman Christopher Dodd, center, has proposed temporarily freezing interest rates to prevent card issuers from raising them before reforms take effect.
Senate Banking Chairman Christopher Dodd, center, has proposed temporarily freezing interest rates to prevent card issuers from raising them before reforms take effect. (Susan Walsh/associated Press)
By Ylan Q. Mui
Washington Post Staff Writer
Sunday, November 8, 2009

Clear out the holiday catalogues, the Christmas cards and the coupons, and your mailbox may look less than festive. Now that the credit card industry is required to warn you about any changes they're planning, you should be scrutinizing what you think is only junk mail.

When you open that mail, you may discover that your interest rates are rising, or switching from fixed to variable. In addition, some card issuers are instituting higher balance-transfer fees and raising teaser rates -- or eliminating them all together. The warnings come courtesy of sweeping reforms required by a law enacted this spring that is being phased in over the next year.

"We would urge everyone to read that mail," said Ellen Bloom, director of federal policy for the advocacy group Consumers Union. "Check twice."

The new law puts strict limits on how and why issuers can raise interest rates and impose penalties. One of the first provisions took effect in August and required credit card companies to notify customers 45 days before any rate increase and give them a chance to cancel the card and pay off the balance at the existing rate.

That's what happened to Mary Lynn Slayden, 58, of Haymarket. She has used the same card for more than a decade -- it was a lifesaver when her husband was stationed in Australia as a naval officer, she said -- and made payments on time. But last month she got a letter alerting her that the rate on her balance of roughly $15,000 would increase from a fixed 5.9 percent rate to a variable 9.9 percent in December. The notice cited the new federal regulations.

"I've been very concerned about this," Slayden said. "We are so not a risk to them."

She said she doesn't want to cancel a credit card she's had for such a long time and is worried about the impact closing the account could have on her strong credit score, which she said is in the 800s. She has thought about transferring the balance to a card with a lower interest rate but would incur a fee of about 3 percent.

"To indicate that federal legislation is responsible for these new terms for our credit card is in my view financial propaganda attempting to absolve this institution from making a purely business decision," Slayden wrote in a letter to her issuer.

The banking industry had warned lawmakers that the new regulations could result in rate increases because they restrict issuers' ability to adjust rates for riskier customers. For example, starting in February, the law will prohibit credit card companies from increasing interest rates because a cardholder has missed payments on other accounts, a practice known as universal default.

While that helps protect some consumers from what regulators say were excessively punitive measures, the industry said it also means that customers in good standing will see their rates rise. In addition, some cards have reportedly raised annual fees for users who do not carry a balance.

"We basically socialized the bearing of the risk," said Ken Clayton, managing director of card policy for the American Bankers Association, a trade group. "That's why good customers sometimes have to bear the cost of the risk that others pose."

Issuers say that customers' financial strain has also taken a toll on the industry's business: Credit card bills are often the first to go unpaid when money is tight. According to the ABA, bank card delinquencies -- payments that are at least 30 days overdue -- rose to a record 5.01 percent of all accounts during the second quarter of the year. Issuers must raise rates for paying customers to help recoup those losses, the group said.

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