Credit CARD Act has unintended consequences

I winced when my friend told me he had been paying some of his bills with credit cards. He had a reasonable rate, he said, and it was buying him time to get his financial house in order, following a layoff in April.

"Don't do it," I told him, which is easy for me to say because although I've been impacted by the recession, I still have my job. He has used up a chunk of his savings.

Monday, he handed me the "love letter" he'd received from Citibank, a company whose parent, Citigroup, received an infusion of $45 billion from taxpayers as part of last year's storied bailout of the country's struggling financial institutions.

The letter didn't even bother to couch what was coming with the customary thanks for being a good long-term customer.

"Dear X, We are making changes to your account terms." And then it laid it out: "These changes include an increase in the variable APR for purchases to 29.99 percent." And, oh yeah, that's also on the existing balance that you charged when you thought the rate was reasonable.

He said his credit score and payment history are excellent.

Yikes.

I commiserated with him, then went home to find a similar letter in my own mailbox. And I know I've been a good customer.

Last May, after receiving a boatload of complaints about credit card companies that were coping with their own financial crisis by raising interest rates on consumers without fair notice, Congress adopted the Credit CARD Act (Credit Card Accountability, Responsibility and Disclosure Act). The new law says that consumers have to be given 45 days notice before their rates are raised and that rates cannot be raised on existing balances unless a consumer has failed to make the payment as required. If you borrow at 10 percent interest, it cannot magically turn into 20 percent interest at the whim of the lender. Unless, that is, they hurry and do it now.

Congress, in the interest of fair play, gave credit card issuers affected by the new law a grace period until February before the act takes effect.

Some of the credit card issuers, in turn, have shown they are primarily interested in fair play when it's flowing in their direction. What's happening is not unique to Citi; I've received complaints about a number of credit card companies that are now raising interest rates and imposing other changes that won't be so easy under the new rules.

Some of the companies have changed card terms from a fixed rate to a variable rate. That's significant because if a card has a variable rate, it's not protected by the Credit CARD Act. Variable rates are tied to the prime rate and that's a moving target. Ups and downs are expected.