This year’s credit card reform laws will deliver consumers long-overdue protections from dubious industry practices. But don’t breathe a sigh of relief just yet. The credit card companies, already reeling from a year of record losses, will find new ways to make credit card users pay. Here’s what you need to know to take advantage of the upcoming credit card industry changes and how to avoid letting the industry take advantage of you!
What’s Changing About Credit Cards?
Beginning in February 2010, credit card companies can no longer raise the interest rate on an existing balance unless you are more than two months late with a payment. Also, cards can no longer apply your payments to balances with lower interest rates before higher interest rates (a common trick with 0% APR balance transfer offers). Finally, a credit card won’t be able to raise your interest rate if you miss a payment on another credit account.
Although this is all good news for consumers, the credit card industry isn’t just going to lie down take it. Card issuers are already raising interest rates (I have received rate increase notices from both Citi and Capital One), slashing customers’ credit lines or closing accounts, and retooling rewards programs. Until the new card laws go into effect this February, the card companies can still play dirty. But even after the new laws take place, you’ll want to be vigilant for other credit card tricks that will cost you. Here are some simple strategies to keep your credit card companies in check and your credit score healthy.
#1. Use Your Cards Regularly
Card issuers are already taking inactive credit card accounts and cutting credit lines or canceling the accounts altogether. What’s the big deal if you didn’t use the card anyway? For one, even though credit cards should always be a last resort—available credit does provide some peace of mind should emergencies arise. But that’s not all: A lower credit limit (or one less credit card) will negatively affect your credit score. The solution? Rotate the cards you use from month to month so you occasionally use every card you own.
#2. Keep Balances Small
You never want to max out your credit cards, but ideally, you don’t even want to carry a balance of more than 20% of your available credit (10% is even better). Not only will a high debt-to-limit ratio lower your credit score, it will also raise red flags with creditors when they review accounts for rate hikes, limit reductions, or cancellation.
#3. Don’t Be Late!
Paying a credit card even a day late is an expensive mistake. There’s the $39 late fee and the chance you’ll be charged a default interest rate of over 25% or 30% for six months, a year, or longer! Your credit score will also suffer. Although the new credit card laws will make it more difficult for credit card issuers to extort you for just one missed payment, there may still be costly consequences. Sign up for email alerts of upcoming payments or automatically debited monthly payments (just be sure your checking account will have to cash to cover it) and never risk making a late payment ever again.
#4 Be Proactive About Your Rate…and Your Rewards
Gone are the days when you could call almost any credit card company and get a lower interest rate simply by asking. Although this may still work if you have impeccable credit, nobody should wait around for their credit card companies to jack their interest rates. The bottom line: If a low rate is important to you (i.e., you sometimes carry a balance), find a card that has a really low rate. To find them, look to local banks and credit unions, where rates are as low as half of major banks’ credit cards. Most of these cards won’t offer rewards, but remember that earning 2% cash back while carrying a balance at 10%, 12% or 15% does not add up in your favor!
Never carry a balance? If you like to charge everything you buy, pay the card off monthly, and collect the rewards, you could care less about your interest rate. So keep a close eye on your mail and credit card statements to make sure your favorite card doesn’t start trimming back its rewards programs. If it does, don’t be afraid to shop around for a better deal.
#5. Watch Your Accounts
Credit card issuers are notorious for making small sneaky changes that all add up in their favor: rate hikes, hidden fees, rewards reductions, etc. Although, by law, they must notify you of these changes, they often do so with small pamphlets of fine print that arrive in envelopes that look like junk mail. If you even bother to open the envelope, you probably won’t read the thing anyway! This year more than ever, open those envelopes and read the contents! Know what’s happening with your credit cards so your card issuers cannot take advantage of you.