Credit Card Rates on the Rise: What Notice Is Your Bank Required to Give?

The world is experiencing an economic crisis. Banks are getting bailout money from the U.S. government to help them remain viable, but it is not always enough. What else are they doing to survive? Banks and credit card companies have taken a step toward increasing interest rates on credit cards in order to combat the rising cost of extending credit. For instance, ABC News recently reported that Bank of America, Citigroup, JPMorgan Chase and American Express have all announced plans to raise or have already raised interest rates on some credit card accounts. These rate hikes are affecting not only personal accounts, but also business card accounts. Does your business have a credit card that you use for incidentals or major purchases? If your personal or business card rate increases, how will you know?

A regulation issued by the Federal Reserve under the Truth in Lending Act requires that credit card holders receive notice of any rate change. Under 12 C.F.R. §226.9(c), if credit card interest rates are changed or if required minimum periodic payments are increased, the creditor must mail or deliver written notice of the change—at least 15 days prior to the effective date—to each individual or business who may be affected. Therefore, your bank or credit card company cannot surprise you on your next statement with an increased interest rate.

What if your rate has increased because you have exceeded your credit limit or have made late payments? Under those circumstances, do you still have a right to receive notification? When will the increase become effective? In a recent class action suit, the United States Court of Appeals for the Seventh Circuit held that a financial institution does not have to notify you that it has increased your rate for those reasons, provided you were previously informed that the bank or credit card company had the right to increase your rate. In Swanson v. Bank of America, N.A., et al., decided in March 2009, Bank of America informed the plaintiff upon issuing the card that if purchases caused her balance to exceed the $5,000 credit limit at the end of two months in any rolling 12-month period, the bank could increase her interest rate from 18% to 32% per annum. Later, the bank sent Swanson a notice amending the terms to provide that the higher penalty interest rate would take effect at the beginning of the billing cycle to which it applied. Swanson agreed to these terms by continuing to use her credit card.

Swanson's account was over her credit limit at the close of the billing cycles in August, November and December 2007, and Bank of America raised her interest rate effective at the start of the November-December billing cycle. That increase cost Swanson approximately $60 more than if the bank would have notified her in December of its decision to raise the rate, and then had applied the increase at the start of the December 2007-January 2008 billing cycle. Arguing that 12 C.F.R.
§226.9(c) requires notice and forbids rate changes that apply to the entire billing cycle in which the change occurs, the plaintiff sought a refund of the $60 plus statutory penalties.

The court disagreed, holding that banks may apply higher penalty interest rates to the entire billing cycle in which the card holder's default occurs. The court emphasized that while the point of advance-notice requirements is to allow customers to shop for better rates, they are not entitled to avoid fees for defaults such as late or skipped payments, or over-limit charges. The court also found that structuring the penalty interest to apply to the entire cycle and therefore having the same effect as charging a penalty fee in the initial month did not undermine the goal of advance-notice requirements. The rationale behind that finding was that Swanson and others in her position could still shop for better credit card rates in future months.

However, things are about to change. The Federal Reserve Board has added a new subsection, §226.9(g), that prevents retroactive changes and requires a 45-day notice of higher interest rates, expressly trumping any contractual provisions that authorize faster changes. Therefore, when §226.9(g) goes into effect on July 1, 2010, a bank will be required to give 45 instead of 15 days of notice, and will have to defer a higher penalty rate until 45 days of notice has been given.

In light of the economic crisis, it is more important than ever to read any mail you receive from your bank or credit card company. That tiny slip of paper you may be tempted to toss into the trash could be notice that your interest rate is going up in 15 days, or that missing a payment could double your interest rate. Either way, that is not the kind of surprise you want to encounter when preparing to pay your next credit card bill.