Card Rate Leaps After Limit Exceeded

Dear Credit Card Adviser,

I have a credit card and for the first time in its history, I went over the limit by $200. My interest rate was increased from 9.99% to 24.99%. I have always paid on time and more than minimum. I called and said I didn't think this was allowed under the new law. I should only have to pay an overlimit fee of $25 or so. I was told no, that's not how it works.

I spoke to someone at another bank about how they would deal with the above issue a few weeks ago. I was told they had the late fee and overlimit fee charge of $25. I recently received a letter that stated the bank would now charge 29.99% if I was late on my payment on a card that has a 9.99% rate. It says nothing about being 60 days late in payment or a penalty fee.

Is this legal under new law? I appreciate any information and advice you can give me.-- Lois

Dear Lois,It's a good thing you caught the change to your credit card account. The law you mentioned, which is formally known as the Credit Card Accountability, Responsibility and Disclosure Act of 2009, does impose restrictions on rate increases applied to existing balances.

Credit card issuers can't raise your rate and apply the higher rate to your existing balance unless the increase was triggered by a 60-day late payment, index movement, the expiration of a promotional rate or the termination or completion of a workout arrangement on debt reduction or other concession between the issuer and cardholder. Going over the limit isn't one of the few exceptions.

However, an issuer can raise your rate for any reason after the first year and apply the increased rate to new charges, with 45 days' advance notice. If you have an existing balance, your old interest rate will still apply to it, according to a fact sheet about the Credit CARD Act on the Federal Reserve's website.

The law set limits on penalty fees at up to $25 for violations such as missed payments and overlimit transactions, and up to $35 for a second violation within six billing cycles. But it didn't cap penalty interest rates, which means that exceeding a credit card limit could trigger a sky-high interest rate on new purchases.

As for the overlimit penalty, issuers aren't allowed to assess an overlimit fee without your prior consent to allow transactions that exceed the limit. Without this opt in, issuers cannot charge this fee but they can reject over-the-limit transactions.

You can try calling to fight the rate increase, citing the fact that you have never before gone over your limit. If that fails, you could just pay off your balance at the existing rate and use other credit cards for new purchases.

You might not even have a full 45 days before the new rate kicks in for new purchases. In fact, you may have just two weeks after the notice was sent. According to HelpWithMyBank.gov, an educational website for national bank customers, "At the end of the 45-day period, the bank can begin charging the new rate for any balances you accrued after the 14th day after the bank sent the notice."

Confusing, right? This loophole is one of the head-scratching gotchas of the Credit CARD Act.

If you close the account, the issuer can't charge you a penalty fee or require immediate repayment of the balance, but it can double your minimum payment percentage or require you to pay off the balance in five years. The account closure can have a temporary but negative effect on your credit score once the balance is paid off.