Credit-Card Laws' Unintended Consequences

NEW YORK (TheStreet) -- The Credit CARD Act took effect this week, putting protection in place for consumers. But the law has resulted in unexpected fallout that might hurt more than it helps.

The CARD Act will put restrictions on interest rate hikes, limitations on marketing credit cards to adults under age 21 and a ban on over-the-limit fees. Here are some unintended consequences:

1. Since issuers will be unable to raise interest rates on new accounts for 12 months, they simply raised the advertised APR before Feb. 22 so it affected everyone shopping for a new credit card account. According to the LowCards.com Complete Credit Card Index which tracks over 1,000 credit cards, the advertised annual percentage rates for credit cards averaged 13.46% last week. Six months ago, the average was 12.11%, and a year ago, it was 11.51%.

2. People under 21 will find it harder to build up their credit score. If they do not have a job with enough income, they must get an adult to co-sign. Many young adults will not take this extra step, losing out on the opportunity to form a good credit history throughout college. Without a positive credit history, they may not receive as good an interest rate on their first house or car loan.

3. Fees, fees and more fees. Issuers are introducing more cards with annual fees, increasing existing fees and putting new fees on accounts. Last October, Bank of America ( BAC) notified a small percentage of their customers that it is adding an annual fee of $29 to $99 on their accounts beginning in February. Last week, Citigroup ( C) announced that they will assess a $60 annual fee beginning in April, which can be credited to your account if you spend $2,400 in the next year. Balance-transfer fees, which have been at 3% for most issuers, have now been increased to 5% by JPMorgan's ( JPM) Chase and Discover ( DFS). Fifth Third Bancorp ( FITB) recently added a $19 inactivity fee if your card is unused for a 12-month period.

4. The scarcity of fixed-rate credit cards. Most issuers switched their fixed-rate cards to variable rates, since the CARD Act allows APR increases in variable-rate cards if the index used to calculate that variable rate increases. As an example, if the index for a variable-rate card is tied to the prime rate, and the prime rate increases by 1%, the APR on that card can increase 1%. Many issuers switched their fixed-rate cards to variable-rate cards so they could maintain their margins once the CARD Act was instituted.

5. Since any amount above the minimum monthly payment goes toward the balance with the highest APR, some issuers raised the minimum payment up to 5% on a number of accounts.

6. A decrease in the amount of credit card rewards or cash rebates. Reduced rewards could come in different forms: a cutback in the payouts of cash back cards; more miles or points needed for that free airline trip or hotel stay; or higher tiers required for consumers to receive the same level of rewards. If your payout on your rewards program does get reduced, you can always shop for a new credit card. Be sure to compare three or four possible rewards cards by looking closely at the terms and conditions.

7. A decrease in the number of credit cards awarded by retail stores. Providing proof of income when applying for a credit card will make it significantly harder for consumers to instantly qualify for a credit card. This will certainly impact the marketing efforts of the 10% to 15% discount on a purchase if you sign up for a store's credit card. Retailers rely on this marketing strategy to increase purchases and to build their mailing list of customers used for offering future coupons or early-bird discounts.

-- Reported by Bill Hardekopf of LowCards.com.

Bill Hardekopf is the chief executive officer of LowCards.com, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."

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