This post is part 3 in a series of articles in which CreditGumbo.com's credit experts dissect and examine the 2009 Credit CARD Law and provide insight on its likely ramifications.

One of the provisions in the new Credit CARD Law that has credit card issuers most worried is the new set of requirements for charging fees when a customer exceeds his or her credit limit. As the card companies have waged price wars by slashing introductory APR's, the so-called "nuisance fees" make up a significant portion of credit card profits. In fact, over the past 10 years, over-the-limit fees alone have risen 85% – most issuers are now charging between $35 and $39 for exceeding the credit limit; in 1999 the average was only $20 (source: US GAO Credit Cards report, 9/06).

To put the new law in some perspective, let's first look at the current practices of the card companies. Nearly every issuer has policies in place to authorize transactions that will put a customer over their credit limit without informing them that this is happening. While this can be fairly characterized as a courtesy to the customer so that their transaction is not declined at the point-of-sale, it is also one that is very profitable for the card issuer. Many issuers maximize their fee revenues by assessing an over-the-limit fee if a customer's credit limit is exceeded at any point in the billing cycle. This means that often times a customer can be charged two over-the-limit fees for one over-the-limit transaction. Because a customer is often unaware of the over-the-limit situation until they see it on their billing statement, they have already entered a second billing cycle over their limit which will trigger another over-the-limit charge.

The Credit CARD Law will curtail these practices by providing more control and better disclosures to the customer. Specifically, the law provides that starting in February 2010:

• Each customer must be given the opportunity to "opt-in" to over-the-limit fees. If a customer does not authorize these fees, the card issuer is prohibited from charging them. While this provision will likely eliminate many of the over-the-limit fees that are charged today, it will also likely result in many more transactions being declined.


• Only one over-the-limit fee may be charged in a billing cycle. Though it is uncommon today for credit card issuers to charge multiple over-the-limit fees within the same billing cycle, legislators acted preemptively to prevent issuers from starting this practice in the future.


• No over-the-limit fee may be charged in 2 consecutive billing cycles unless the customer has made an additional over-the-limit transaction. This will prevent the practice of fee-doubling for one over-the-limit purchase.

The challenge now for consumers is to determine whether it is more important to eliminate all over-the-limit fees, or to retain the flexibility to exceed the credit limit – and continue to pay fees. The law states that customers are free to change their over-the-limit fee election at any time by contacting their credit card issuer, so the initial decision you make is not permanent and can be changed if your credit needs change.

As we've pointed out in our previous discussion on the Credit CARD Law, the credit card companies will find a way to recoup the revenues that they will forego as a result of these changes. We expect to see more cards with annual fees, a cut back in generous rewards programs, and potentially the elimination of the interest-free grace periods enjoyed by many credit card users. So while the law is designed to be "pro-consumer," there are many who will actually see a higher cost associated with using plastic in the future. Please continue to check back with us at CreditGumbo.com as we delve further into this new legislation over the coming weeks. You can find all of our related commentary on our Credit CARD Law blog page.

Labels: Credit Card, Credit Card Law