New regulations went into effect on February 22, 2010, that are designed to protect consumers. Overall, this is a very important and good development. But listen to me and listen good: You can still end up in plenty of high-cost trouble if you don't stay one step ahead of the bank credit card issuers.
Here are some key issues to keep an eye on:
What's new: If you pay your bills on time, the interest rate on your existing balance cannot be raised. Pay attention: Notice I said "existing balance." If you, in fact, miss a payment, the interest rate on new, unpaid balances that occur after the misstep can indeed be raised.
What's new: The rate on a new card can't be raised for the first 12 months. But after that, it is fair game for the issuer to raise it as long as you are given 45 days notice. (The higher rate would not apply to existing balances, only new, unpaid balances.) Pay attention: If you are ever 60 days late with a payment, the credit card issuer can raise your rate regardless of how new a client you are. That said, if you then make on-time payments for six months, you will be eligible to have your lower rate reinstated.
What's new: Your monthly statement will now include an estimate of how long it will take you to pay off the balance if you opt to make only the minimum payment due and the amount of interest you will owe over that stretch. It will also show you an estimate of how much you would have to pay each month to get the balance paid off in three years. Pay attention: Anyone with an unpaid balance should tape this to their mirror and stare at the numbers at least once a day. This is not punishment; it is motivation. Many of you with balances of $10,000 that charge 15 percent, 18 percent or more will see it can take decades to pay off the balance if you only pay the minimum, and your total cost can be nearly triple your current balance.
What's new: Your payments will now be used to pay off your highest-rate debt first. In the past, the credit card companies liked to apply your monthly payments to the lowest-rate debt and let your most costly unpaid balances keep mushrooming. Congress, thankfully, has put the kibosh on that ridiculous treatment. Pay attention: While this sounds like a great change, the reality is that if you have high-rate balances you are in bad shape, period. My advice is that if you are paying more than 18 percent on any debt, check out whether you can qualify for a balance transfer to a card issued by a credit union. By law, credit unions cannot charge more than 18 percent interest, and in fact many charge less. Bank credit cards have interest rates of 30 percent or more. Go to CreditCardConnection.org to search for good credit unions cards near you. What's new: Two of the most annoying practices are now 100 percent outlawed: No more double-billing cycles, and no more universal default. Pay attention: These are both big wins for consumers. No longer can the banks use your average daily balance from your prior billing period and your current statement when figuring out your interest charges. Just your current balance will be part of the calculation. This will lower interest charges for those of you with an unpaid balance. And with the demise of universal default, credit card issuers can no longer use the fact that you may have a late payment on another account—such as utility bill or a cell phone bill—as an excuse to raise your credit card interest rate.
What's new: Your card issuer can't automatically let you charge more than your credit limit and then charge you an over-the-limit fee. Pay attention: Your card issuer will send you a notice asking if you want to opt into this practice. DON'T YOU DARE. Do you hear me?
What's new: Your kids under the age of 21 will be unable to get a credit card on their own unless they have verifiable income. Pay attention: This is actually great news. The credit card issuers were preying on college students who hadn't yet learned how to handle credit. But that means it's now on your plate to do the teaching. I would start in high school by first adding your child to one of your cards as an authorized user, assuming you have a FICO score of at least 700. They will start to build a credit profile based on your credit history. It also allows you to help them learn the ins and outs of credit cards with a bit of guidance. Sit down together each month and review the bill and talk about minimum payments, interest charges, etc. It's your chance to educate. When they head off to school, you can, in fact, help them get a card of their own, but only if you agree to co-sign. If you go this route, set clear guidelines: Set a very low credit limit that can not be changed without your approval (and decline the option for the issuer to allow your child to exceed the credit limit). Also, make it clear to your child that you will have full online access to the account. Not to snoop, but to make sure the bill gets paid on time. What's new: Banks are not going to sit back and watch billions of dollars of fee revenue vaporize. The reality is that they are working overtime right now dreaming up ways to keep raking in the money.
Pay attention: Interest rates are going up (yes, you will get a 45-day heads up). According to a recent Wall Street Journal report, the average interest rate (APR) had already risen from about 12 percent six months ago to 14.2 percent today. For individuals with weak credit, the average APR is now 24.9 percent compared to 14.3 percent six months ago. Expect more of that going forward as the banks take advantage of any opportunity to make money. Look, you know my advice here: Pay off your balances and only charge what you can afford to pay off each month. But that's a goal that may take time. I get it. Again, I encourage you to look into a balance transfer to a credit union card. Go to CreditCardConnection.org to search for credit union offers.
I also want to mention that a few costly practices were not changed. Credit card issuers can still charge hefty balance transfer fees. A year or so ago, it was common to be hit with a maximum fee of $75 or so. Today, many card issuers charge a flat percentage of the amount transferred, and it can be 3 percent or more. That adds up fast. Another practice that was not changed or rolled back was the fact that many card issuers changed how they calculated your minimum payment due. It used to be as low as 1 percent and now is often 3 percent to 5 percent. While that's actually very good for consumers because it means the balance will be paid off faster, the timing of this shift—during the most crippling recession and the highest unemployment rate in more than 25 years—was (and is) deplorable.
The bottom line is that the new credit card protections are a big help. But they require you to still be an active and vigilant consumer. Stay sharp, read your statements and do your very best to charge only what you know you can afford to pay off at the end of the month. Do that, and you don't have to care what interest rate is charged on unpaid balances.