Beware of the credit card traps

by Editorial, San Francisco Chronicle

At last, a federal law reining in some of the more exploitive practices of the credit-card industry took effect this week. But consumers who have been paying close attention to the fine-print correspondence in the mail, the purveyors of plastic have not been passive in preparation for the new rules.

Millions of Americans have received notices in recent months that they are about to get socked with higher interest rates and annual fees, or squeezed with lower limits on their credit cards.

Moreover, customers who look closely at their bills might be surprised to see an array of new fees. For example, some banks are initiating fees on online purchases from foreign merchants or charges for such heretofore routine services as paper statements or extended warranties. Some banks have even initiated "inactivity fees" for cards that are not used for several months.

The good news is that the law will curtail the ability of lenders to openly prey on the vulnerability of consumers who are addicted to plastic either by financial predicament or, in some cases, lack of sophistication. The average American had a credit-card balance of $5,400 at the end of last year. The law requires monthly statements to show how long it would take to pay off the balance by making minimum payments – one of the worst traps for consumers.

The new law also cuts down on the aggressive marketing of credit-cards on college campuses. Cards can be issued only to applicants who can show an ability to repay.

Overall, a restraint on credit-card excesses is not only good for consumers, it is healthy for the industry as well. Last year, U.S. banks had to write off about $35 billion in credit card debt.

But with the end of the era of easy indebtedness comes a need for consumers to look even closer at the detailed cost of their credit cards. The banks might be making less money on overextended customers, but they will be hitting us all with new and increased fees.

What the new law does

Here are some of the major provisions of the Credit Card Accountability, Responsibility and Disclosure Act, which took effect Monday.

— Transparency: Customers must be told how long it would take to pay off their balances if they made only the minimum payment.

— Penalties: Customers can exceed their credit limit only if they agree in advance to pay a penalty fee.

— Interest: Companies are no longer allowed to suddenly raise a customer’s rate. They must provide cardholders who are current on their payments at least 45 days’ notice. Also, companies can no longer engage in "universal default" – going through clients’ financial records and using late payments on unrelated bills as a pretext to raise rates.