Federal Credit-Card Law to Create New Traps for Consumers

A new federal credit-card law that takes effect Monday could erase billions of dollars a year in fees and interest charges paid by consumers. But card issuers are already deploying new tactics that could prove costly for even the most cautious cardholder.

The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.

Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.

"There are countless fees that can be introduced and rates can go through the roof," says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.

Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don't pay on time, your interest rate is 29%.

The new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009, couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing bubble and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults as unemployed Americans and other cash-strapped customers stop paying their debts. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will bring more red ink unless there is a miracle rebound.

The banks could be hurt further as consumers try to clean up their finances, especially high-cost credit card debt. The average American was running a credit-card balance of just over $5,400 at the end of 2009, down about $200 from five years ago, according to TransUnion, a Chicago-based firm that tracks credit data. In such an environment, consumers may push back against new card fees or jump to a rival issuer determined to compete by keeping fees low or nonexistent. 

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