Two Credit CARD Act Loopholes You Need to Know About Right Now

Loophole #2: If you’re more than 60 days late with a payment, you can get hit with a retroactive interest rate increase.

You know, we all thought the CARD Act had taken care of those nasty retroactive rate increases. But the Credit CARD Act identifies a few exceptions and being more than 60 days late is one of them.

So if you receive notice that your rate is increasing because your payment is more than 60 days late, your new rate, which might be the penalty rate, is applied to the outstanding balance. The outstanding balance is defined as the balance 14 days after the notification is mailed. And the penalty rate takes effect 14 days after it’s postmarked.

If you’re more than 60 days late with a payment and you’re hit with the penalty rate, here’s a timeline to keep in mind:

August 1: Your credit card company mails a notification that your APR is increasing from 12 percent to 29.9 percent, the penalty interest rate.

August 15: Your entire outstanding balance on this day is subject to the 29.9 percent rate. If your balance is $10,000 on this day, your new higher rate is applied to the entire $10,000, plus any purchases you make from this point forward.

September 15: This is the 45-day point, so you’ll start getting statements that reflect your new 29.9 percent APR and it’s applied to your outstanding balance as of August 15^th.

[Resource: Dusting Off Your Credit Cards? 5 Things You Absolutely Must Do]

I contacted all six major credit card issuers and asked how they handle these two loopholes. Betty Riess, a spokeswoman for Bank of America, said, “If we do raise the rate, the customer will be notified at least 45 days in advance before the rate on new transactions takes effect. Also, we do not raise rates on existing consumer credit card balances even if the customer goes 60 days late and we have no plans to do so.”

Riess says that Bank of America is aware that they could do so under the CARD Act, but they choose not to. It should be noted that Bank of America has recently been criticized for notifying consumers that a 29.9 percent penalty rate might be applied to accounts that are even a day late. So at least they won’t be applying such a high rate retroactively.

But Chase, Discover, Capital One, and American Express all replied that they are applying the rules the way they’re interpreted by the OCC. These four issuers begin applying the new, higher APR 14 days after the notice is mailed. If a consumer is more than 60 days late with a payment, the new, higher rate is applied retroactively to the outstanding balance. Citi didn’t respond to repeated requests for information about how they handle this situation.

Keep in mind that these practices are entirely legal and within the confines of the CARD Act. It just wasn’t publicized, so most consumers don’t know about it. The best thing to do to protect yourself, regardless of which bank maintains your credit card account, is to open your mail immediately and read it twice. Be aware of the timelines I’ve outlined here so you know when the higher rate is being applied.

[Resource: Get your free Credit Report Card]

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Image by Mike Bitzenhofer, via Flickr