FDIC Consumer News
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New Realities, New Directions for Credit Cardholders
8 ways to avoid pitfalls in areas such as interest rate and fee increases
As previously reported, Congress in 2009 passed a new law for credit cards that helps protect consumers from most instances of sudden interest rate increases and other unfavorable changes in fees and account terms. Most of the rules implementing the law are now in effect, and the remaining provisions will be effective on August 22, 2010. But here's something else to know — it's possible consumers could face account changes going forward, such as interest rate increases on future transactions and the imposition of new fees or penalties.
How can you avoid potential pitfalls in the new world of credit cards? FDIC Consumer News offers these simple strategies.
- Understand your right to cancel a credit card before certain significant account changes take effect. Under the new law, card issuers now must generally tell customers about certain changes in account terms — in
areas such as interest rate and fee increases — 45 days in advance, up from 15 days in the past. In that same notice, they must inform consumers of their right to cancel the card before certain account changes take effect. These notices may come with your credit card bill or through a separate communication.
"It's important to read everything from your card issuer, even what appears to be junk mail," said Kathleen Nagle, FDIC Associate Director for Consumer Protection. "Be aware of when the new rate or fee will take effect, so you can have enough time to shop around for a new card, if necessary."
Consumers who notify their card company to cancel their card before fees are increased or certain other significant changes take effect will still be required to repay the outstanding balance, but they cannot be required to repay it immediately. However, the card company can increase the minimum monthly payment, subject to certain limitations.
Also note that there are exceptions to the 45-day notice requirement. For example, you will generally not receive advance notice of a rate increase on a card with a variable interest rate that will fluctuate based on an advertised index, such as the prime rate.
- Keep an eye on your credit limit. Some people, even those with good credit histories, have recently seen their credit limits cut back. Reductions in credit lines can be harmful because your borrowing power will be diminished. Also remember that your credit score is based, in part, on what percentage of your credit limit you are using and how much you owe. Borrowers who carry large balances in proportion to their credit limit may see their credit scores fall. And a lower credit score can make it difficult or more expensive to get new credit in the future.
How can you reduce the risk that your credit limit will be cut or your credit card account will be canceled? One factor that credit card companies consider is how you pay your bills. "It's important to show a steady, timely payment history," reported Evelyn Manley, a Senior Consumer Affairs Specialist at the FDIC. Paying all your credit-related bills by the due date — that includes your credit card bills as well as your car loan, mortgage and other debts — shows that you're a responsible borrower.
Also, pay as much of your credit card bill as you can each month. If possible, pay in full, but definitely try to pay more than the minimum balance due.
What should you do if you’ve already had your credit limit cut? Put a renewed focus on lowering the amount of money you owe on your credit cards.
Also, consumers who have difficulty making their minimum payments on time may benefit from speaking with a reputable credit counselor to get help or guidance at little or no cost.
For a referral to a local counseling agency, one option is to call the National
Foundation for Credit Counseling at 1-800-388-2227 or visit them at www.nfcc.org.
For more information on how to safely pay down credit card debts, including how
to avoid scams that target people in financial trouble, check out the new Federal
Trade Commission fact sheet "Settling Your Credit Card Debts," online at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre02.shtm.
- Decide how you want to handle transactions that would put you over your credit limit. Under the new law, no fees may be imposed for making a purchase or other transaction that would put your account over the credit limit unless you explicitly agree, in advance, that the credit card company can process these transactions for you and charge a fee.
"Even if you agree to over-the-limit fees, you have the right to change your mind down the road," said Luke W. Reynolds, Chief of the FDIC’s Community Outreach Section. "You would simply instruct your card issuer to deny any transactions that would exceed your credit limit and would trigger a fee."
In either case, he said, "you still should monitor how much you’ve charged on your card so you don't exceed the credit limit."
- Be cautious with "no-interest" offers. Many retailers, such as electronics or furniture stores, promote credit cards with "zero-percent interest" on purchases for a certain amount of time. These cards allow you to buy big-ticket items, perhaps a sofa or a stereo system, without paying interest for anywhere from six months to more than a year. While the chance to avoid interest payments sounds like a terrific deal, keep in mind that if you don’t follow the rules for these offers, this "no-interest" special could end up being expensive.
The reason is, with many of these offers, you must pay off the entire
purchase by the time the promotional period ends to take advantage of the zero-rate offer. If you don't, the lender will charge you interest from the date you bought the item. You would then have to pay interest — at the lender's standard rate — from the date of purchase. And if the Annual Percentage Rate or APR on the retailer's card is higher than what you would pay on another card you have, the extra costs could really add up. The APR is the cost of credit expressed as a yearly rate, including interest and other charges.
- Keep only the credit cards you really need and then periodically use them all. Some consumers have too many credit cards. Among the concerns: Those extra cards can lead some people to overspend. Also, having many cards with no existing balance or a very low balance can reduce your credit score because prospective lenders can conclude that you have the potential to use them and get into debt.
For the average person, two or three general-purpose cards are probably enough. Consider cancelling and cutting up the rest. However, also remember that closing a credit card account can temporarily lower your credit score, especially if the cancelled card was one you owned and used responsibly for many years.
With the credit cards you do keep, remember to avoid large balances on them in relation to the credit limit. And in the new environment, it also may be beneficial to periodically use all of your cards. Here's why. Even if you pay your card bill in full each month and never pay interest, using your card earns money for the card company because merchants pay a fee each time you use the card. So, consumers who regularly use their cards and repay their debt may be considered valued customers, even if they pay on time and don’t pay interest. "Regular purchases promptly paid off may be enough to reduce the risk of a credit line reduction, inactivity fees and other penalties," said Susan Boenau, Chief of the FDIC's Consumer Affairs Section.
- Do your research before paying high annual fees for a "rewards" card. Rewards sound great in advertisements for credit cards, but the points formula can be complicated, the rules are subject to change, and the benefits may not be as generous as you think. You should always read the fine print and be realistic about your likely use of the card before you accept an expensive annual fee in return for rewards.
- Take additional precautions against interest rate increases. "Although the law puts new limits on interest rate increases, you need to remain vigilant," Manley added. For example, while card companies cannot increase the interest rate on existing balances except in certain circumstances, they may raise rates on extensions of credit for new purchases as long as proper notice is provided.
"If you receive a notice that your interest rate is increasing," Manley said, "determine whether you have another way to make future purchases, such as by waiting until you have saved enough money for the purchase or by using a card with a lower interest rate."
Rate increases also may come in another form. For example, some fixed-rate cards may be converted to variable-rate cards after a notice has been sent to cardholders. This would result in variable rates being applied to new balances.
Also note that a credit card company can increase the rate on an existing balance if the consumer fails to send the minimum payment within 60 days of the due date. So, it's very important to avoid being more than 60 days late on a credit card. If you miss a due date, you can avoid a "penalty" interest rate on that existing balance by getting your payment in within 60 days. And if you’re more than 60 days late and that does trigger a rate increase, get current on your credit card payments as soon as possible and then start consistently paying on time. Card issuers are required to reduce the penalty rate if they receive prompt payments for six months.
In general, what else can you do to get the best rates? Keep in mind that a credit score is built up over long periods, not just over one or two years, so make all your loan payments on time. Even if you have past blemishes, you can improve your credit score over time by managing your credit well. Be aware that if you can only afford to pay the minimum amount due, you probably won’t get the best rates. But if you can pay more than the minimum each month — as much more as possible — that will work in your favor.
Also, carefully read the terms of a new credit card before using it. If the card has a high interest rate or fees, shop around for a better offer.
- Parents of young adults have a new opportunity to teach responsible management of credit cards. The new law includes protections for young consumers, including a requirement that anyone under 21 who wants to obtain a credit card must have a qualified co-signer on the account or must prove he or she alone can repay any debt. This is intended to protect young people from getting overwhelmed by credit card debt. But it also offers an opportunity for parents to teach their kids about responsible use of credit cards.
"Parents should have discussions with their children about how credit cards should be used and repaid," said Reynolds. "They may even want to make sure their kids have taken a financial education course before they have access to a credit card."
If you're considering co-signing for a credit card with a young adult, it's best to have an understanding (if not a written agreement) that you will get early notice of any troubles, including late payments, so you can keep on top of the credit card and work out problems with the lender before your own credit record is damaged. "One way or another," Reynolds added, "parents should make clear their expectation to their child — the cardholder — that the child will pay the credit card bill on time, and that the child keeps this fact in mind when using the card."
And what if, despite your best planning, your child (or any other co-signer for a credit card or loan) can't or won't make the payments? As a co-signer, you are obligated to pay the debt to the lender, and not doing so can damage your own credit report.
"By enhancing required disclosures, making them more understandable, and limiting the ability to change terms and interest rates on existing balances, the law has given consumers greater control of their credit cards," said Reynolds. "But the first step in taking advantage of these legal protections and the competitive marketplace is to become more proactive in simple areas such as reading all the communications from your lender and by shopping around for the best deals."
For more on managing credit cards, visit the U.S. government Web site www.mymoney.gov.