“Economists like to call the banking system the heart of the economy,” states economist Joseph E. Stiglitz in his book Freefall: America, Free Markets, and the Sinking of the World Economy. This may certainly be the case as the Federal Reserve estimates that U.S. households hold approximately $827 billion in revolving credit, most of which is credit card debt. On August 22, 2010, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 took effect, designed to inject consumer protection rules into a gift card and credit card system that was draining many cardholders of their functional values.
Regulatory Limits on Gift Card Fees and Expiration Dates
The Credit CARD Act of 2009 regulates bank credit and gift cards – many of which carry the Visa, MasterCard, or American Express imprints. One of the changes under the Act is that gift card issuers can only deduct point-of-sale purchase fees during the first 12 months of the gift card's life. Fees charged to consumers after the 12 month period must be clearly displayed on the card, along with a web address and telephone number for consumer questions.
Before the fee limiting Act, bank gift card companies were charging a variety of fees. Some card issuers were even assessing fees for customer service phone calls, according to L.A. Times business writer Kathy M. Kristoff. Jennifer Tramontana, a spokesman for the Network Branded Pre-paid Card Association, reports that transaction and inactivity use fees were ranging from $1 to $5. Under the new regulations, bank gift card issuers are banned from charging more than one fee in a given month. Also, bank gift cards cannot expire less than five years after issuance.
State Law Gift Card and Credit Card Regulations
Prior to the new financial regulations under the Obama administration, states like California already had similar levels of state consumer protection laws governing gift cards issued by retailers. Where state law gives greater consumer protection, the federal regulation provides that state law rules – allowing the higher level of state regulatory protection. According to Bill Hardekopf of LowCards.com., in California this will work to allow consumers to continue to redeem cash balances on gift cards with less than ten dollars.
2010 Credit Card Regulatory Reforms
Credit card reform under the federal regulations bar inactivity fees on credit cards. Also, penalty fees are generally capped at $25 per transaction, a $10 to $14 reduction from previous industry standards according to Kristoff. An exception to this rule applies where a credit cardholder has made late payments more than once within six months. The card issuer can then charge up to a $35 penalty fee.
Where credit card issuers hiked interest rates after January 2009, presumptively in anticipation of passage of the financial regulations, the law requires that card issuers review a cardholder's rate hike every six months to determine if a lower rate is warranted. For instance, a cardholder should receive a rate reduction if the hike was due to the consumer's late payments and there are no late payments within a six month period.
Further, if a credit card interest rate hike was due to market conditions, under the new law consumers should see a rate reduction within six months after market conditions improve. The tricky part is that the card issuer determines whether a rate cut should be made. This does not, of course, limit cardholders from initiating the review process where conditions warrant.
Anticipated Rise in Credit Card Interest Rates and Reduction of Credit Availability?
FICO, the U.S. credit scoring and lender risk management service provider, released its quarterly survey of bank risk professionals on September 7, 2010. It indicated evidence of a credit gap between consumer credit demand and lenders expected credit availability. Forty-six percent of respondents expected credit approval criteria to increase, according to the survey, which was conducted by FICO Labs and Professional Risk Managers' International Association (PRMIA).
"Although the outlook isn't as pessimistic as it was earlier this year, it's clear we still haven't reached a point of equilibrium between supply and demand for consumer credit," said Dr. Andrew Jennings, chief research officer at FICO and head of FICO Labs.
The loss of penalty fees and penalty interest rates have many market analyst anticipating interest rate hikes. According to the market research firm Synorate, interest rates on the average credit card rose from 13.1% in second quarter 2009 to 14.7% in second quarter 2010.
"If you carry a balance, you're probably going to be paying more interest," reports Hardekopf to the L.A. Times. "It's always been smart to pay your balance off every month, but it's getting even smarter."
References:
- Stiglitz, Joseph E., Freefall: America, Free Markets, and the Sinking of the World Economy, W.W. Norton & Company (2010).
- Kristoff, Kathy M., "Plastic Currency: Federal Credit Card Regulatory Reforms," Los Angeles Times, August 29, 2010.
General disclaimer: this article is for information purposes only and should not be substituted for legal or other professional advice.
Vanessa Cross - Vanessa Cross is a freelance writer who writes about international trade, business law and small business development issues.
