Credit Card Act loophole driving move to variable rates

Millions of credit card holders are being shifted from fixed rate credit cards to variable rate cards primarily because of a loophole in the Credit Card Accountability, Responsibility and Disclosure Act, which was supposed to protect consumers from large interest rate increases, spiraling fees, and changing terms.

The bill might have passed with great fanfare and promises of protection against unfair rate increases, but the credit card companies have already found a loophole to avoid the bill. The bill was designed to give card holders fair warning about rate increases, but still allows for credit card companies to raise rates without giving any notice or warning, even after the bill goes into effect, if the card has a variable rate.

"There is a tremendous loophole in this law and it is those credit cards with variable rates." Bill Hardekopf, CEO of and author of The Credit Card Guidebook. told me by email. "Now that we are learning more about the details of the bill, surprises like this may start coming out."

Many credit card issuers and banks are rushing to switch their fixed rate cards to variable rates ahead of the new law. "Bank of America and Chase have both announced that they are switching fixed rate cards to variable rates. They are probably hoping that consumers will not notice the change right now because the prime rate is so low. With the current prime rate, most APRs will remain the same even with the switch from a fixed to a variable rate. However, once the Fed starts raising the prime rate, it is going to make the variable rate cards increase automatically and without much notice or warning," wrote Hardekopf. "The prime rate is the lowest we have seen in history. Rates won't stay at historic lows forever."

Both Chase and Bank of America state that because of the changes in regulations, they are forced to make the changes to variable rates to keep up with the market. Other credit card companies have not yet changed their fixed rate cards to variable rates, but Hardekopf thinks it is only a matter of time.

Senator Chris Dodd, one of the sponsors of the bill, spoke out against rate increases last week. He asked the Federal Reserve and other regulators to make and enforce rules that will force credit card companies to abide by a provision of the new law designed to prevent rate hikes before the law takes affect. That provision says that credit card issuers must review every six months any account where the rate has been raised since January 1, 2009. If the customer has become less of a credit risk, or the circumstance no longer warrants an increase, it directs the companies to reduce the rate.

Unfortunately if Dodd thinks the Federal Reserve will act, he's dreaming. The Federal Reserve has taken no action to assist credit card holders throughout this entire crisis. Even when it did put new rules into effect the start date for the rules was July 2010. Congress had to move that date to February 2010. If Dodd is serious about protecting credit card holders from this loophole there is only one thing that he can do -- pass a new law correcting this loophole and others that may come to light.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score.
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