Discover debuts reform-law compliant credit card terms

'Creative' new charges replace those the law bans

By Connie Prater

Discover has become the first of the major credit card issuers to unveil the details of how its cards will operate under new, stricter credit card regulations.

The new terms abolish fees and practices banned by a credit card reform law that goes into effect next year, but introduce other charges to take their place.

Minimum payments and penalty interest rates are going up. Cash advance APRs that once had fixed rates are going to variable rates (the prime rate plus 20.74 percent). Although the credit card law protects consumers from arbitrary interest rate hikes on existing balances, it does not regulate rates on future purchases with the card. Discover customers who miss just one payment will be hit with a default rate for future purchases that is at least 5 percentage points higher than their normal APRs. (See summary of changes.)

Issuers being 'creative'
"The issuers are really being creative to get the most money out of their customers," says Lauren Bowne, an attorney for Consumers Union, the San Francisco-based nonprofit owner of Consumer Reports magazine. Bowne, who has been tracking changes in credit card terms, says many credit card issuers are introducing new terms that attempt to get around the credit card law restrictions.

"The first piece of advice for consumers is to read everything that is sent from their card companies," Bowne says, "even if they don't carry a balance on a card. Some companies are adding annual fees or dormancy fees for not using a card enough. Once people understand the terms, they need to consider whether it is worth keeping a card open."

New notices sent to Discover's cardholders begin, "We are making changes to your Account in response to new federal law and regulations that impact all credit card companies." The credit card issuer is rolling out many of the consumer protections required in the Credit CARD Act of 2009 well before the Feb. 22, 2010, deadline set by the law.

A first glimpse
The Discover changes are the first real glimpse of how other credit card issuers may revamp their terms to comply with the new law. None of the other major issuers have released a full snapshot of their terms. But many are raising rates and fees and introducing new features, such as variable-rate floors and interest refunds for those who pay on time.

"Everybody's cards are changing," says Bowne.

The timing of the start of the Discover changes may not be a coincidence. Some of Discover's new terms are slated to take effect as early as Dec. 1, 2009, the same startup date selected by lawmakers lobbying for faster implementation of consumer credit card protections.

Discover card changes taking effect starting Dec. 1, 2009

Interest rate hikes on existing balances. APRs won't increase for existing card balances if card users pay late or exceed their limits. However, one late payment will trigger a default interest rate for future purchases made with the card. The default rate will be up to 5 percentage points higher than the normal APR. Some fees are out. The new law requires issuers to show that fees are reasonable and related to the infraction and that consumers must "opt-in" to over-limit fees. The law bans charging consumers fees for making payments unless they are for last-minute, expedited payments. Discover is eliminating both over-limit and pay-by-phone fees beginning Feb. 1, 2010. No penalty interest rates for the first year. Starting Jan. 1, 2010, Discover won't hike interest rates due to late payments or over-limit charges during the first year of new accounts. Accounts with variable interest rates can still go up if the prime rate does. APR reductions. Starting Jan. 1, consumers paying default interest rates may have their APRs reduced after the issuer reviews the account. The credit card law requires a rate reduction after six months if the review shows good payment behavior. Payment allocation. When cardholders pay more than the minimum amount due each month, the excess payment will be applied first toward balances with the highest APR. The law requires that issuers apply that excess amount to the higher APR balances first or equally across all accounts. Discover has chosen the method that benefits consumers the most. Currently, most credit card issuers apply payments to balances with the lowest APRs first, prolonging the time it takes to pay off high-APR balances and adding to consumers' finance charges. Payments are due by close of business. Discover is abandoning its policy of requiring that payments are due by 1 p.m. on the due date. Instead, payments will be due by 5 p.m. local time at the company's payment processing center. Not all the news in those change-in-terms letters is good for Discover customers. Cardholders were also notified that as of Jan. 1, balance transfer and cash advance fees are going up to 5 percent of the amount transferred (compared to the industry average of 3 percent a year ago). Minimum monthly payment amounts are increasing as of Dec. 1, and may include the amount by which cardholders have exceeded their credit limits and any unpaid balances from the previous month. In other words, if you go over your credit limit by $50, that $50 may be tacked on to your minimum payment the next month. But the notices also offer this reminder: "Making a higher monthly payment will help you pay down your balances faster."

The U.S House of Representatives voted 331-92 Wednesday, passing an expedited credit card bill (H.R. 3639). That bill would require major card issuers -- those with more than 2 million credit card accounts -- to be fully compliant with the new credit card law as soon as a similar measure is passed in the U.S. Senate and signed by President Obama. A Senate version of the bill (S. 1833) was introduced in late October by Colorado Sen. Mark Udall.

In addition, banking committee Chairman Sen. Christopher Dodd has introduced a bill (S. 1927) to require an immediate freeze in interest rates, fees and finance charges until the credit card law takes effect in February. Under Dodd's proposed freeze, credit card issuers would still be able to increase rates and fees if cardholders are more than 60 days late paying their monthly bills, have variable interest rate cards, have "teaser" or introductory rates that expire or if card users renege on or complete debt repayment plans.

Dodd's moratorium was included in the House version of the bill that passed on Wednesday.

Issuers fight fast tracking
The banking industry has fought fast-tracking efforts, saying lenders need time to revamp their business models and upgrade billing, marketing and application processes to comply with the mountain of new regulations coming.

Discover notes throughout its letter to customers that the new terms are not due to their credit reports: "We made these changes due to the impact of new federal law and regulations, taking into account the extent to and manner in which you use your Account." Discover spokesman Matthew Towson pointed out that although they are rolling out changes before Feb. 22, they still need more time to implement other requirements.

"Discover has already implemented many provisions of the CARD Act and even gone beyond the requirements in some cases," Towson wrote in an e-mailed response. "However, we have stated previously that it would be nearly impossible for us to be in full compliance of the CARD Act by Dec. 1, but we hope [to] be fully compliant before the effective date of the new law, Feb. 22, 2010."

Why then do lawmakers feel the need to fast track consumer safeguards? Consumers have been hit with one interest rate hike after another in the months since the credit card law was signed by President Obama. Fees for everything from balance transfers to cash advances have gone up, rewards card redemption points have gone down and annual fees have returned as routine features of many credit card accounts.

"They have used this time to gouge consumers and to raise rates," Rep. Carolyn Maloney, the Democrat from New York who sponsored the expedite bill in the House, said during debate on the legislation Wednesday. Her Republican colleague, Rep. Jeb Hensarling of Texas, said speeding up the legislation will exacerbate the credit crunch. "It just couldn't come at a worse time."

Following introduction of the bill to expedite the credit card law, several major banks, including Bank of America, Discover and Capital One, pledged to stop raising interest rates (except for penalty rates for nonpayment) until the new law takes effect. Critics have pointed out that most of the damage had already been done -- with issuers raising rates on millions of accounts during the first nine months of year, in part because of the economy and in anticipation of interest rate restrictions included in the credit card law.

Study: Many top issuers aren't in compliance
A survey of the top 12 bank and top 12 credit union credit card issuers released Oct. 28 by the Pew Charitable Trusts found interest rates have increased by nearly 23 percent since June 2009. The survey noted that all the bank-issued credit cards reviewed used practices that would be outlawed.

The Pew study noted that Discover and American Express have announced they will discontinue charging over-limit fees. In addition, four other issuers have already stopped charging the fee. "Though commendable, these steps have not yet led to the elimination of unfair or deceptive practices. We encourage issuers to comply with the Credit CARD Act immediately ..." the report stated.

Bowne, from Consumers Union, said her review of some of the newly introduced credit card terms points to reasons for consumer to beware. Some of the language in the change-in-terms notices may be confusing, even for attorneys. Bowne said she had to call Discover's customer service line for an explanation of its grace period clause. She urged consumers to call the card issuer for plain-language explanations of the changes and how they impact their family budgets.

"It's a good opportunity to educate people," she said. "They need to be reading these things. People need to experience reading these things -- even people that don't carry a balance. There are some cards that they are instituting dormancy or annual fees on. For people who just have the card and just have it open and aren't using it, they need to decide if it's worth it to have the card open and pay a fee."

She added: "If your credit card company makes changes that are going to make it impossible for you to make a payment or it triples the life of the loan, in the long run, the impact on your credit score of closing an account is not going to be worth defaulting on an account."