Banks Abusing "Grace Period"

A federal chairman accused banks of abusing the grace period they were given before the credit card Act of 2009 takes full effect. While banks may deny such claims, consumer advocate groups fear that he could not be more right.

On the average, low and middle income consumers owe $9,827 on credit card debt. According to analysts, those who meet minimum monthly payments at 10 percent interest will take it more than 26 years to pay their balances off, including $6,812 in interest. However, if an average cardholder's rate was raised higher, even at a seemingly minimal 3 percent higher, it could take him a lifetime to pay off such debt.

In May, President Barack Obama signed Credit CARD Act into a bill to protect consumers from excessive rate hikes. Under it, banks cannot raise interest rates without notifying consumers 45 days in advance. Moreover, starting February next year, banks cannot raise rates on existing balances unless a cardholder is in default.

However, House Financial Services Committee chairman, Barney Frank, says banks are abusing the few remaining months left before new consumer protection law takes full effect. Advocacy groups could not agree more.

As noted by consumer advocates, Wells Fargo announced this month that it is raising interest rates on existing accounts by up to 3 percent. Other card issuers follow suit, including Bank of America and JPMorgan Chase. Both banks are accused by advocates of raising interest rates before new law takes full effect in February 2010.

Additionally, both Bank of America and Chase transferred many cardholders from fixed to variable rate cards back in June. Even the new law does not protect variable card policy holders from sudden interest changes since those are permitted as prime rate moves up and down.

Unfortunately, those who get hit worst by sudden interest climbs are low and middle income families. According to Demos, advocacy group headquartered in New York, majority of low- and middle-income households rely on credit cards to cover for unavoidable expenses such as medical bills and household necessities. The group adds that cards become more important for those families after a job loss.

Advocates also note that higher interest rates could only lead to longer payoff periods and thousands of additional dollars in interest payments.

However, analysts assure consumers that banks cannot go a step too far in interest rate hikes. They explained that excessively high interest rates on credit cards will push many consumers into default. Banks usually make up from default losses by raising rates further. But experts say card issuers will eventually come to a point when they can no longer let their clients make up for their losses.

Jennifer Brown

Jennifer Brown, an external business consultant working with a Fortune 500 company, has years of experience to her credit. Despite having a busy schedule through the day, she takes time out to write articles dealing with credit cards, payday loans and other financial aspects. She has completed her Bachelor degree in Financial Services from Columbia University and has been actively involved in various activities for the betterment of society.