Why You Can’t Upgrade Your Credit Card In the First Year

After reading my previous post on best rewards card for groceries and gas, reader Tom wanted to upgrade his American Express card to the AmEx Blue Cash Preferred card which pays 6% rewards on purchases at supermarkets and 3% rewards on gas but charges a $75 annual fee. The higher rewards make the annual fee worth it.

He was super-nice to let me send him a refer-a-friend email so I can earn a referral bonus from American Express. To his surprise, American Express denied his upgrade request. No it wasn’t about his credit. A customer service representative at American Express gave this as the reason:

"I would like to inform that consumer accounts that have been open less than 13 months are not eligible to be transferred to a new Consumer account if a change would result in a higher Annual Membership Fee."

That’s a bizarre policy. Here Tom wanted to pay a higher annual fee to American Express but they refused to take it only because Tom’s account has been open for less than 13 months. Why would a company refuse business from a customer? Is American Express insane?

Of course not. Blame it on the unintended consequences of laws.

Congress passed and the President signed the Credit Card Accountability, Responsibility, and Disclosure Act ("CARD Act") in 2009. Among other things, it added a new section 172 to the Truth in Lending Act. It says:

"(a) Limitation on Increases Within First Year – Except in the case of an increase described in paragraph (1), (2), (3), or (4) of section 171(b), no increase in any annual percentage rate, fee, or finance charge on any credit card account under an open end consumer credit plan shall be effective before the end of the 1-year period beginning on the date on which the account is opened."

I highlighted the applicable parts in red. Basically during the first year they can’t increase your annual fee even if you ask them to.

What are those exceptions in "paragraph (1), (2), (3), or (4) of section 171(b)"? They are:

  • end of previously disclosed promotional APR
  • variable APR going up with the underlying index
  • end of a workout or temporary hardship arrangement
  • late on minimum payment for more than 60 days

A voluntary request from the consumer is not included as an exception. That means if you want to switch your card to a different one with a higher APR or a higher annual fee, you can’t. The law doesn’t allow it even if the APR never matters to you because you always pay in full or if you are perfectly OK with the higher annual fee because it comes with better rewards. You will have to either wait until after the first year or apply for a new card.

I can understand why they didn’t include "voluntary request" as an exception. They were afraid if they allowed it as an exception, unscrupulous credit card companies would do a bait-and-switch and say the consumers asked for it. In protecting the innocent consumers, those who know what they are doing are inconvenienced.

What do you think about this? Too much nanny state or acceptable tradeoff for the greater good?

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  1. J says

    I see it as an acceptable trade-off for the greater good. If the average American could be trusted to look after himself, we wouldn’t have needed this CARD Act in the first place.

    Many years ago a co-worker told me about how he fell deep into debt with credit cards. He’d accepted credit card offers on his college campus and mistook the convenience checks for “free money.” He made dumb mistakes with his first few years of credit card use and spent the following years paying off tens of thousands in credit-card debt.

    This was a smart man, highly regarded by all of his co-workers, yet he made crippling financial mistakes because he did not fully understand the financial instrument of credit cards. I doubt he was the only American to make these kinds of mistakes.

  2. Dan says

    I agree with J. No piece of legislation is going to be perfect. I think the overall good that will come out of CARD act outweighs the fact it isn’t perfect. It also may have just been an oversight when the legislation was written.

  3. JeffB says

    Put me down as well for acceptable trade-off. People’s relationship with their credit card company shouldn’t be the equivalent of speed dating.

    Could reader Tom just put away his existing AmEx card and open a brand new account?

  4. Harry Sit says

    @JeffB @Dan L – Yes, applying for a new card is an option but Tom didn’t want to do that. Upgrading an existing card will keep the same card number, keep the rewards already earned in one pot, and avoid a new inquiry on the credit report.

  5. Dan L says

    I’d be curious if they would give the 0% for 12 months on purchases and $150 cash back incentives to an existing account that was upgraded. I could have saved the ding on my credit report if they would but I suspect that they would not. BTW, I would have given you the referral bonus, but I applied for the card before I stumbled on this thread. I like your blog. Thank you.

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