Controlling debt isn't only about managing money, it's also about knowing how to play the game.
Despite passage of the May 2009 Credit Card Accountability Responsibility and Disclosure Act ("The Credit CARD Act"), the days of tricks and traps by banks and other financial institutions are far from over.
Some things to watch out for:
1) There's No Cap On Fees And Interest Rates
Although the CARD Act requires banks to give customers 45 days notice of any changes to their interest rates, there's nothing in the law that stops them from raising interest rates as high as they want.
The same holds true for fees. If customers go over their credit limit or are late on repayments, there's no limit on the amount of penalty fees banks can charge. A study by the Pew Charitable Trusts found that large banks charge a median of $39 for late and over-limit fees. Could we one day see banks raise those rates to $60, $80 or even $100?
2) Variable Interest Rates
Instead of fixed-rate credit cards, more and more banks are tying customers' interest rates to an adjustable "index rate," usually a prime borrowing rate as published in The Wall Street Journal. Depending on your creditworthiness, your annual percentage rate (APR) will be a certain number of percentage points above that prime rate. For example, a bank might add 3 to 17 points for purchases, 18 points for cash advances, or 24 points for penalties to that index rate. As goes the prime rate, so goes your APR.
As of November 2009, the prime is 3.25 percent -- a low that's not been seen since the 1950s. So for consumers, it's unlikely the variable rate APR can get much lower. In addition, the Pew study notes that many cardholder agreements include language that allows banks to keep a rate that won't fall below a certain threshold. In other words, despite what you've heard, what goes up doesn't always come down.
In addition, banks don't have to notify you of a change in the index rate; they're not changing your APR if your APR can always be changing.
3) It's Not So Easy To Restore Your Old Interest Rate
Let's say you've been late on a payment or two. Your bank decides to teach you a lesson and socks you with a 28.99 percent APR on your balance. In the past, you might be subject to that whopping rate for as long as you hold your card. The CARD Act offers you some protections. It prohibits banks from imposing penalty interest rates unless the account is 60 days past due and it requires issuers to restore your previous APR after six consecutive months of on-time payments.
Here's the catch: According to Pew, you'll only see your old interest rate again if you start those on-time payments immediately after the penalty rate takes effect. If you don't shape up right away or you miss a payment during those six months, your bank might continue charging the penalty rate indefinitely.
4) Surcharges On Transactions
One area that the CARD Act does not address is transaction surcharge fees for cash advances, balance transfers and other services. These charges -- usually based on a percentage of the transaction -- have typically hovered around 3 percent. But what you see today may not be around forever. These costs can still be changed arbitrarily.
We're already seeing some evidence. In comparing data from July 2009 to December 2008, Pew found that half of Bank of America's credit cards now have a 5 percent cash advance fee. In their earlier data set, no Bank of America cards had a 5 percent cash advance fee.
5) Raising Interest Rates And Locking Them In
In the past, a key provision of many credit card contracts was the infamous "any time, any reason" clause, which enabled card issuers to arbitrarily raise interest rates whenever they felt like it.
They won't be able to do that anymore, thanks to the CARD Act. However, between the date of the bill's signing and the 15 months that elapse before all the new rules get implemented, banks have raised rates nationwide on cardholders.
6) Higher Minimum Monthly Payments
In FRONTLINE's 2004 report, The Secret History of the Credit Card, financial services consultant Andrew Kahr explained that he convinced clients to lower the monthly payment requirement to 2 percent of the balance to entice customers to borrow more. Today, in an effort to curb credit default losses, banks want more of their money back sooner and are raising monthly payment requirements to 3 or 5 percent.
7) Some Old Fees May Return
Banking industry officials warn the 2009 credit card law will lead to reduced availability of credit and an increased cost for it. They say the reforms will inhibit their ability to do "risk-based pricing" -- meaning charging each customer interest rates based on his or her creditworthiness. Without this ability, banks say they'll need to eliminate credit for some people, or charge everyone more for the credit they have.
So to offset revenue losses due to more regulation, banks may rely more on fees.
Remember that "No Annual Fee"? It's been a common marketing strategy for two decades. But now more and more card issuers are reinstating annual fees.
Other credit card companies have added inactivity fees, whereby banks charge you if your account lies dormant for a year or if you fail to spend a certain amount of money with the card. If you're someone who carries plenty of credit cards and only uses a couple of them, you may want to check that you don't get hit with these additional expenses.
8) The Coast Isn't Clear On Debit Card Overdrafts
Several banks announced changes to their overdraft policies in fall 2009, bringing sighs of relief from customers who've paid multiple fees for overdrawing their accounts .But consumer groups say that the banks' overdraft policy revisions (PDF) and new Fed rules on the matter don't go far enough.
Among those banks who have changed policies, Chase is the only one that is making efforts to deduct debit and ATM card transactions in the order they were received, rather than switching the order of transactions from highest to lowest amount. Many banks continue to manipulate the order of transactions for debit, ATM, and checks -- a tactic consumer advocates describe as a way to incur more overdraft fees.
Under the new (November 2009) Federal Reserve rules, banks are now required to get express consent from customers to opt in to overdraft polices for debit and ATM transactions, but banks do not need approval from customers to enroll them in overdraft policies for checks and electronic payments. Also, the Federal Reserve puts no limits on the amount or number of penalty fees that can be assessed against overdrafts. Several banks have now set the limit at four overdrafts per day, but at $35 a pop, customers could still be charged as much as $140 a day in overdrafts.
9) The Cost Of Prepaid Cards And Gift Cards
Prepaid cards -- also known as prepaid debit cards -- are sold at retail stores across the country and can be obtained without credit checks or bank accounts. And they do not have overdraft fees. As one of the fastest growing parts of the consumer credit industry, prepaid cards are billed as convenient and "safer than cash." [See a related New York Times article.]
But they have also been criticized by consumer groups for a lack of transparency regarding hidden fees that can drain the balance of a prepaid card. Many charge fees for balance inquiries, point of sale transactions, cash withdrawals and inactivity.
And then there's gift cards. These may save you the headache of dealing with wrapping paper and tape, but they might saddle recipients with some of the same fees as prepaid cardholders. Gift cards can be either merchant specific -- Best Buy, Target, etc. -- or general-purpose gift cards that come with a Visa, MasterCard or American Express logo, which makes them usable at any number of stores.
If you have concerns about your card, ask questions at the time of purchase and be sure to read the fine print. Otherwise, the gift card you thought was $75 could wind up being worth much less.
The CARD Act includes some protections for gift cardholders. The law states that gift cards must have a five-year shelf life. Many practices that reduce balances will also be eliminated. The Federal Reserve also recently announced new rules for gift cards.
Zachary Stauffer is a journalist with the Investigative Reporting Program in Berkeley, California. He is also a freelance director of photography who works regularly with FRONTLINE and FRONTLINE/World.