Credit cards still have plenty of pitfalls

CHICAGO — The new credit card law is receiving widespread kudos as a victory for cardholders over the lenders that impose “gotcha” fees and penalties with scant justification and little notice.

Indeed, an industry that has been virtually unregulated will now be reined in - to customers’ benefit - in many ways. Interest rates no longer will be allowed to be raised retroactively if you pay your bills. Terms will be clearer, over-the-limit fees curtailed and rates fairer.

Still, there are pitfalls to the legislation passed by both houses of Congress and signed into law by President Obama on Friday, and some are likely to hurt consumers.

“People can start to feel a lot more comfortable about the rules of the game,” said Adam Levin, chairman and founder of Credit.com, a San Francisco-based company that provides education and information about credit products. “But there will be some fallout, and it might be a short-term negative.”

Here is a closer look at some unintended consequences of the new law that are likely to occur:

• Higher rates: Issuers are considered certain to bump up annual percentage rates (APR) soon to compensate for the fact they can’t increase them on new customers for one year after the regulations take effect in late February. Not only are introductory rates likely to rise, but APRs on existing accounts may well go up too - especially if you do anything to show that you are a greater credit risk.

• Annual fees: The free ride is likely to end for many who use their credit cards as a convenience and pay off their balances in full every month. Squeezed by the economy and further by this law, banks will target people who have avoided paying an interest charge or an annual fee - until now.

• Lost grace periods: Trying to make up for lost revenue, banks are considering charging interest from the date of a purchase instead of allowing a grace period, now typically 20 to 25 days. The best that cardholders may be able to hope for is an option from their issuer, said credit card expert Ben Woolsey. Either pay an annual fee or lose your grace period.

• Other fees and penalties: The new regulations put no restrictions on fees for balance transfer, cash advance or late payment. All are likely to rise, as foreshadowed by Bank of America’s and Discover’s plans to boost their balance transfer fees to 4 percent from 3 percent June 1.

• Tighter credit: Consumers with lower credit scores will find it harder to persuade strapped card issuers to give them credit because of the new regulations.

• Cutback in rewards programs: Card companies have long used rewards to retain customers’ loyalty, giving them cash-back rewards, frequent-flier miles and other perks. Now they won’t be able to subsidize those programs when they are not making as much from finance charges and penalty fees.

Industry officials’ threats during the lobbying process to cut them back sharply could prove to have been a bluff, but analysts and consumer experts still expect them to be trimmed to some extent.