credit card transaction

Whether or not credit card interest rates can go up as a result of the Credit CARD Act of 2009 has been the source of much confusion. A new federal court ruling ends some of the debate, at least for now.

The U.S. Court of Appeals for the Ninth Circuit has dismissed a lawsuit (McCoy v. Chase Manhattan Bank) against Chase Manhattan Bank that alleged Chase did not have the right, without prior notice, to raise the interest rate of a cardholder who was in default. The suit claimed Chase had increased the rate retroactively, which is prohibited by the Truth in Lending Act (the precursor to the Credit CARD Act), and also that the increase was "discretionary" and not based on a schedule or formula set out in the cardholder's agreement, which is illegal in Delaware, where Chase Manhattan is headquartered.

The appeals court had initially sided with the cardholder, but a review by the U.S. Supreme Court reversed the lower court's decision regarding the retroactive increase, and remanded the case back to the appeals court for decision on the state issue of discretionary increases.

The final verdict affirms that the credit card issuer has the discretion to raise the interest rate on a delinquent cardholder's existing balances without prior notice, in accordance with the credit card agreement. The verdict also allows for the lowering of interest rates without notice. The claim of discretionary rate increases, those which do not follow a schedule or formula, was also dismissed with the lower court stating credit card issuers could raise interest rates as they saw fit if the ability to do so was clearly stated in the original credit card agreement. The ruling gave Chase the right to use its discretion when increasing the interest rate, up to the maximum default rate stated in the agreement.

There has been no appeal of the decision as yet, but for now the consequences of defaulting on credit card terms are a little clearer.