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New credit card law is mixed blessing
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NEW YORK (AP) — Your next credit card statement is going to contain an ugly truth: how much that card really costs to use.
Now, thanks to a long-awaited law that goes into effect Monday, you’ll know that if you pay the minimum on a $3,000 balance with a 14 percent interest rate, it could take you 10 years to pay off.
“Jaws will drop,” said David Robertson, publisher of The Nilson Report, a newsletter that tracks the industry. “I don’t doubt for a nanosecond that it’s going to give a lot of people a sinking feeling in their stomachs.”
That's not all that will make them queasy.
During the past nine months, credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed down millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.
It wasn’t supposed to be this way. The law that President Barack Obama signed in May shields card users from sudden interest rate hikes, excessive fees and other gimmicks that card companies have used to drive up profits. Consumers will save at least $10 billion a year from curbs on interest increases alone, according to the Pew Charitable Trust, which tracks credit card issues.
But there was a catch. Card companies had nine months to prepare while certain rules were clarified by the Federal Reserve. They used that time to take actions that ended up hurting the same customers who were supposed to be helped.
Consumer advocates say the law still offers important protections for the users of some 1.4 billion credit cards.
“We expected some rate increases; we expected some annual fees,” said Ed Mierzwinski of the U.S. Public Interest Research Group, an advocacy organization that lobbied for the law.
Among the moves it made:
— Resurrected annual fees.
Annual fees, common until about 10 years ago, have made a comeback. During the final three months of last year, 43 percent of new offers for credit cards contained annual fees, versus 25 percent in the same period a year earlier, according to Mintel International, which tracks marketing data. Several banks also added these fees to existing accounts. One example: Many Citigroup customers will start paying a $60 annual fee on April 1.
— Created new fees and raised old ones.
These include a $1 processing fee for paper statements for cards issued by stores such as Victoria's Secret and Ann Taylor. Another example is a $19 inactivity fee Fifth Third Bank now charges customers who haven't used their card for six months.
Other banks increased existing fees. JPMorgan Chase, for instance raised the cost of balance transfers from one card to another to 5 percent of the transfer from 3 percent.
— Raised interest rates.
The average rate offered for a new card climbed to 13.6 percent last week, from 10.7 percent during the same week a year  ago — meaning cardholders had to pay almost 30 percent more in interest, according to Bankrate.com.
For millions of other accounts, variable interest rates that can rise with the market replaced fixed rates. The Fed is expected to start raising its benchmark interest rates later this year, which would likely trigger an increase on those cards.
Besides making credit more expensive, banks also made it harder to get and keep credit cards. One big reason: Since the financial meltdown, many credit card issuers have been trying to reduce risk.
The number of Visa, MasterCard and American Express cards in circulation dropped 15 percent in 2009, for example. Rarely used cards were among the first cut off. Some cards linked to rewards programs were likewise shut down.
Card companies also slashed credit limits for millions of accounts that remain open. About 40 percent of banks cut credit lines on existing accounts, according to the consultant TowerGroup, which estimated that such moves eliminated about $1 trillion in available credit.
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