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Penalty rate disclosures disappear, along with my trust

Connie Prater

“What can we do to make our credit card your No. 1 card?”

I was stumped by the question posed by a cheery-voiced customer service rep last week. I had called my credit card issuer to request a copy of the credit card agreement for one of my cards.

My colleague Jeremy M. Simon was writing an article about how several credit card issuers, including Bank of America, were no longer revealing penalty interest rates to potential and existing customers and he wanted to see an agreement.

For those who don’t know, a penalty interest rate is the rate that you will be charged if you screw up and miss payments. It is a higher rate than the normal APR for purchases. It’s also known as a default rate.

Why the mystery?
But what exactly would that rate be if I should default on the account?

OK. Let me stop and just say I’m not in any danger of defaulting. That’s totally not my world. Although, things happen and you never know. We’re humans and we can make mistakes.

One of the major points of the Credit CARD Act of 2009 was to bring transparency to credit card ownership and make surprise terms a thing of the past. Well, I don’t know what’s going to happen should the unthinkable happen and I’m not able to pay my credit card bill in 60 days.

Under the CARD Act, anyone more than 60 days late paying their monthly credit card bills can be hit with a penalty interest rate. That increase would be applied to past purchases made with the card. So, a game console or computer you bought with the card a few years ago would actually cost you more by virtue of the retroactive interest rate hike.

I requested a copy of my credit card agreement to see just what my issuer was disclosing about penalty rates.  But when I went through the agreement, there was nothing indicating what my penalty APR would be. Not in the one-page summary box that accompanied the agreement nor in the document itself. The “Penalty APR” was actually mentioned in the contract — in a section (called “Words used often in this agreement”) that gives definitions of key terms.

It read:
“‘Penalty APR’  means the APR(s) which may be applied to Purchases, Balance Transfers and Cash Advances, in certain instances of your default, as described in the section titled, Annual Percentage Rates.”

But when I flipped over to that APR section, there was no mention of what that rate would be. Instead, there was a statement that the company “reserves the right to amend these APRs.”  If the account is more than 60 days past due, the company “may” increase all interest rates. Advance notice would be given if they amend the terms.

The bottom line: The penalty APR is no longer disclosed. A few months ago, the default rates could be as high as 30 percent and they were disclosed along with other key terms and rates. But not anymore.

A BofA spokeswoman said in Simon’s article that customers’ accounts will be reviewed if they default, and the bank will determine if a penalty rate should be imposed and for how much. She contends not disclosing the penalty APR upfront does not violate the Credit CARD Act or the Truth in Lending Act, although it seems to me to dampen the spirit of openness in these laws.

So, in answer to that question from the customer service rep about what my card issuer could do to make their card my go-to plastic, I would say make your product more open. The card that I use most often happens to be a rewards card, although I’m not a rewards junkie (it will be a long time before I amass enough points to really get anything of real value to me).

I don’t carry balances on any of my credit cards now. I pay off what I owe in full every month.

‘I’m afraid of credit cards’
Why? In truth, I’m afraid of credit cards now. Yes, they are incredibly convenient for swift, hassle-free payment mechanisms.  You can’t travel without them and, in an emergency, they are priceless. I don’t feel like I can trust that the card issuers won’t screw me over the very first chance they get — even with my stellar payment record and years of loyal business. I’ve seen too many stories of good customers who have been burned.

Reading through my credit card agreement, it’s clear that the terms are written to protect the bank and not me, the lowly consumer. Can you build a relationship of trust with the scales tipped so unevenly?

Why would you not disclose the penalty rate? Is it because it’s so high that you’d be embarrassed to tell customers? That it would scream usury? Grab headlines and further damage an already dismal banking industry image? Prompt someone in Congress to draft a bill?

Consumer watchdog will take a year
As the Wall Street Journal reported this week, there are plenty of “credit card tricks” still being churned out by the companies. That new Consumer Financial Protection Bureau approved in July 2010 as part of the Wall Street reform law won’t be up and running for at least a year. Until that time I’ll still be a little fearful of what “new features” and changes may be coming for credit cards.

Have you read through your credit card agreement?  As our recent special report shows, many Americans may struggle to get through the fine print. The average adult reads on a ninth grade level, but a analysis shows the average U.S. credit card agreement is written on a 12th grade level. See how blogger Cara Henis fared in trying to read her credit agreement.

See related: 4 in 5 American adults can’t read their credit card agreements, Bank of America stops disclosing penalty APRs, My disagreement with my credit card agreement



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  • Nadia Nassif

    Wow, this was so fabulously written that I cannot help but take the time to respond here. I’m currently doing a group project with a corporate finance class via U-Mass Boston and part of our independent research this week was to sift through the Credit Card Act of 2009. In addition, we were to review current flavors of opinion and prevailing thoughts on the topic.
    Your posts have been very insightful and fully resonate with my individual experiences. As a part time MBA student and full time self employed business owner, wise stewardship over credit and financial decisions have been a top priority. I agree that it will take a whole lot more than the Act of 2009 to resolve such deep and seemingly irreversible behaviors.
    Thank you for offering pointed critiques and alarms and whistles. I’ll go look for that Default APR!