Credit card companies are finding new ways to get their cut, despite the best efforts of Congress to protect consumers from unfair credit card practices.
The CARD Act, the bulk of which went into effect in February, gave consumers increased protections against unexpected interest rate hikes, over-limit fees and major changes to the terms of a credit card. Other rules, which go into effect on Aug. 22, will cap credit card late fees and ban inactivity fees.
However, limiting how credit card companies have traditionally earned their bread has forced them to come up with new ways to charge consumers. Here’s what’s happening:
Interest rate increases. While the CARD Act protects you from unexpected interest rate hikes, it doesn’t prevent credit card companies from increasing your interest rate on future purchases as long as they give you 45 days notice.
Under the new rules, if you have a fixed-rate card, you get to hang onto your interest rate on an existing balance as long as you pay your bill on time. If you have a variable-rate card, however, your interest rate is attached to the prime rate and is subject to change anytime prime changes. A credit card company can also change the margin it tacks onto prime rate or move you from a fixed-rate card to a variable-rate card as long as it gives you 45 days notice.
New credit cards will also carry higher initial rates. Under the CARD Act, credit card companies can’t increase the interest rate on new accounts during the first year, so they’re bumping up the initial rate to make up for the loss of revenue. Interest rates are already increasing, with the average interest rate of a new account now at 16.85 percent, roughly two percentage points higher than the average last summer, according to IndexCreditCards.com.
Credit limit decreases. Even if you’ve paid your bill on time for as long as you’ve had your card, the credit card company may decrease your credit limit. With lower credit limits, credit card companies limit their losses when customers default. A credit card company must notify you of a credit limit decrease, so it’s important to pay attention to notices you receive.
While a lower credit limit may curb your spending – for better or worse – it can also negatively impact your credit score. A large part of a credit score is credit utilization, or how much credit you use (balances) compared to how much credit is available to you (limits) – the lower the percentage, the better. If you carry a balance, a lower credit limit lessens the amount of credit available to you, thereby increasing your credit utilization, which can take a toll on your credit score.
Account closures. In some cases, when the credit card company doesn’t deem an account worth the risk of default or no longer wants the balance on their books, they may close an account. If this happens to you, they will provide notice – but it may be after the fact.
A closed account can also hurt your credit score because it will lower the amount of credit available to you and potentially increase your credit utilization. While you’ll hang onto the credit history on the card for seven years, it may affect the average age of your open accounts, which can also impact your credit score.
New and higher fees, including annual fees and higher balance transfer fees, cash advance fees and international transaction fees.
As credit card companies adjust to the new CARD Act and other rules, it’s smart to pay closer attention to notices you receive from your credit card company online or through the mail. If you see new fees on your statement or anything that doesn’t look right, contact your credit card company for an explanation. You always have the option to opt out of new fees and higher interest rates, pay your remaining balance and close the card. It’s also a good idea to check your credit report on a regular basis and look for any material changes, like credit limit changes or accounts that have been closed.
For more tips and tools to help you manage your home, money and credit – including the most affordable credit monitoring on the web and complete identity theft protection – visit Quizzle.com.
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