A Credit Card Loophole Big Enough for a Mack Truck

Here's something to make your day, week or month -- in case you haven't got much else going on in your life. (Okay, it's true. I don't.) On August 20, two provisions of the new credit card law go into effect. The first requires card companies to give customers 21 days to pay their bills. Not much to say about that except "phew!" for those of us among the eternally strapped who were getting squeezed by card companies who have made it a practice of mailing out statements super-close to the payment deadline.

But August 20 also marks the day when cardcos must give you 45 days' advance notice before hiking your interest rate or changing any other terms. Come February, when the rest of the law goes into effect, the issuers must really suck it up -- or so you'd think. They can't boost the rate on a new card for a whole year (unless you fail to make the minimum payment within 60 days), and they can't apply a new higher rate to old balances on a card you already have.

These rules, however, only apply to cards with fixed rates. Variable rate cards, whose interest fluctuates with an index, like the prime rate or LIBOR, for example, are exempt.

So, wouldn't you know, credit card companies are rushing to switch as many cardholders as they can lay their hands on to variable-rate cards. Discover and Chase have as yet shunted only portions of their customer base to variable rates, but Bank of America, says, spokesperson Betty Reiss, has moved almost all fixed-rate cardholders to a variable rate. (The exceptions are people with new accounts, students, and those in debt management programs.) Fortunately, the switch is unlikely to boost cardholders' APRs right now, because rates are so low. Says Reiss: "The new variable rate is based on the prime rate as of May 31 and does not result in a rate change at this time."

That's fine for now, but, when rates rise again, banks will be able to subject customers to hair-trigger increases just as they did in the past. Worse, the law allows cardcos to boost the rate on balances that were once charged at a lower, friendlier APR. And, there's little likelihood of stopping that, as things stand now. Ben Woolsey, director of marketing and consumer research at creditcards.com, believes that eventually, banks will switch all cardholders to variable rates.

Congress had better do something fast to tweak its new law. Otherwise, consumers will be almost right back where they started.