A cure for penalty rates by issuers

Sunday, October 3rd, 2010

At some point in time, most customers would have faced a situation of having missed a credit card payment. It could have occurred due to simple oversight, or due to the misplacement of a bill, or the fact that the person concerned was travelling and hence unavailable to pay off the bill. Paying a bill late once in a while is alright. But if one gets into the habit of missing more than one payment on more than one occasion, then the card holder would see a sharp rise in the APR`s or the penalty rates.

With the new credit card rule in effect, it is possible to get one`s account back into its original interest rates and “cure” the penalty blues. As per the new provisions made by the credit card accountability, responsibility and disclosure act (2009) the issuers are expected to review the interest rates and restore the penalty rates to the original rates after six consecutive payments are made on time.

When the customer defaults two billing cycles, then the penalty APR comes into place and this can be reverted to the original rates only after 6 on-time payments consecutively (at the higher APR). This is done automatically and without any request from the customer.

However, this new rule is applicable only on the existing balance that has been overdue for more than 60 days. This would not be applicable on fresh purchases. As per the CARD act, an increase in interest rate or the new rate can come into effect after a 45-day notice period. If the card holder satisfies the requirements by making 6 on-time payments and is still left with some balance, then the pre-penalty rates have to be charged on the remaining balance but new purchases can attract fresh charges.

Most credit cards these days are variable rate cards (APR could fluctuate with the prime rate). If there is a change in prime rate during the 6-month period (while making payments on time) then the “cure” rate would vary from the pre-penalty rate.

This change brought about by the new regulation will not help cardholders who have shaky credit and the ones who are in a permanent “debt traps” since the requirements of six on-time payments would not be met. It is a small step and has limitations, as in spite of this provision customers will be paying higher rates for some period will remain in debt. There are no limitations on penalty rates as that would remain under the discretion of the companies. Even if card holders clear off payments within the six on-time payments, they will not see a break in their interest rates.

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