Is this OC tactic legal?

[Weary Traveler]

Just a hypothetical situation here that I need to get opinions about:

A person has a credit card with Big Bank and their limit is $10,000. They owed Big Bank $8,000.

The person made the minimum payment of $250 on Big Bank's card and the next payment cycle finds out their interest rate has been raised to 18%, they've been charged an over limit fee and the minimum payment is now $525.

Their credit limit has been lowered to $7500, interest was added in making their balance $7750 plus a late fee. Once again, they are over the limit.

The person makes the next payment of $625. The credit limit is then lowered to $7000, interest is added in plus a late fee. Interest rate is raised to 28%.

And so on, and so on....

Is it legal for a creditor to set the consumer up in a "no win scenario" where each time a payment is made, the limit is lowered to the new balance, thus causing the consumer to be over the limit each time?

[racecar]

Banks Trimming Limits for Many on Credit Cards - NYTimes.com

[Weary Traveler]

Thanks RaceCar. Good (or bad?) to know many Americans were rowing the same boat with this one.

[Coltfan1972]

The lowering of the credit to under the current balance, I can't imagine does not violate some banking law. However the jacking of the interest rate and then keeping the available credit just a few bucks over what is owed is a very popular, and to the best of my knowledge legal, tactic.

It's basically the reason many of us, myself included, said screw you to the banks, and turned the tables on them. You can only push people around so much, legal or not, before the line in the sand is drawn. Unfortunately for the banks, they did not realize how many consumers would say "enough"

[BV80]

This is from the Credit Card Accountability Responsibility and Disclosure Act of 2009:

SEC. 101. PROTECTION OF CREDIT CARDHOLDERS.

(a) ADVANCE NOTICE OF RATE INCREASE AND OTHER CHANGES

REQUIRED.—

(1) AMENDMENT TO TILA.—Section 127 of the Truth in

Lending Act (15 U.S.C. 1637) is amended by adding at the

end the following:

‘‘(i) ADVANCE NOTICE OF RATE INCREASE AND OTHER CHANGES

REQUIRED.—

‘‘(1) ADVANCE NOTICE OF INCREASE IN INTEREST RATE

REQUIRED.—In the case of any credit card account under an

open end consumer credit plan, a creditor shall provide a written

notice of an increase in an annual percentage rate (except

in the case of an increase described in paragraph (1), (2),

or (3) of section 171() not later than 45 days prior to the

effective date of the increase.

‘‘(2) ADVANCE NOTICE OF OTHER SIGNIFICANT CHANGES

REQUIRED.—In the case of any credit card account under an

open end consumer credit plan, a creditor shall provide a written

notice of any significant change, as determined by rule

of the Board, in the terms (including an increase in any fee

or finance charge, other than as provided in paragraph (1))

of the cardholder agreement between the creditor and the

obligor, not later than 45 days prior to the effective date of

the change.

‘‘(3) NOTICE OF RIGHT TO CANCEL.—Each notice required

by paragraph (1) or (2) shall be made in a clear and conspicuous

manner, and shall contain a brief statement of the right of

the obligor to cancel the account pursuant to rules established

by the Board before the effective date of the subject rate

increase or other change.

[ArtVandelay]

You can read the rules and file a complaint here.

CFPB > Consumer Financial Protection Bureau

I believe Dodd-Frank may be of use if it happened to you recently.

Dodd-Frank and the Law

If it happened before Dodd-Frank was passed and the CFPB was created then you are probably out in the cold.

When the The Bankruptcy Abuse Prevention and "Consumer Protection Act:ROFLMAO2:" of 2005 was passed it basically turned the credit card business into the wild west. The banks started doing things like this just after the BAPCPA was passed in 2005 and it accelerated going into 2008.

Good Luck!

[BrunoTheJDBkiller]

I would say that lowering the limit on the card is legit if it is done so as to prevent you from making further charges. Banks usually do this to protect themselves. They have reviewed your history and have determined that you are no longer creditworthy, and they are within their rights to refuse you further credit.

That aside, rigging the limit so that the interest and late fee puts you over limit each month subjecting you to further charges is a definite no no.

Regulation Z Section 226.56

(4) Over-the-limit fees attributed to fees or interest. A card issuer may not impose an over-the-limit fee or charge for a billing cycle if a consumer exceeds a credit limit solely because of fees or interest charged by the card issuer to the consumer's account during that billing cycle. For purposes of this paragraph (j)(4), the relevant fees or interest charges are charges imposed as part of the plan under § 226.6((3).

You can also add up the interest and all the fees and late charges, take the total, and compute it against the balance to see what the REAL interest rate is. The Smiley case in California and then the US Supreme Court established that these fees are considered to be interest. If the actual rate exceeds either the legal rate or the rate they are charging you, they are in violation.