Come February 22, 2010, the second phase of the Credit Card Accountability and Disclosure Act (CARD Act) will formally be upon us. While there are certainly a number of positive provisions for consumers associated with the changes, the legislation is not without controversy. Opponents of the provisions have warned that many consumers, particularly those with good credit histories, would be affected negatively through actions such as credit limit reductions, increased fees, and cutbacks in rewards program incentives. Over the course of the past six months or so, many of these predictions have come to fruition for consumers, yours truly included. Thus, the question is what can credit cardholders do to proactively prepare for handling these upcoming changes in the most effective way?
According to industry experts, the expectation is that the following trends will begin (or continue) to infiltrate our credit card accounts:
Credit Limit Reductions. It is likely that you may have already seen a hit on at least one account, regardless of credit history. According to data released by FICO, 24 million consumers with unchanged credit risk had their credit limits involuntarily reduced over a six month period ending in April of this year. What can you do to prepare for this? There is no requirement for card issuers to notify you in advance of this action, therefore you must be diligent in reviewing your statement on a monthly basis. If you have a balance and your limit is reduced, you will want to review your ratio of available credit to ensure it is not over 25% to avoid possibly affecting your credit score.
Interest Rate Hikes. Higher interest rates have been descending upon most cardholders throughout the past several months, but beginning in February raising rates becomes “more complicated” for card issuers. For instance, they cannot raise interest rates on existing balances with the exception of increases related to index movement, the expiration of a promotional rate, or a hardship or late-payment scenario. If they do raise your rate or increase fees or charges, they must provide at least 45 days’ notice and only apply these new rate(s) to future transactions. How do you protect yourself from this? Make sure you thoroughly review all the mail that comes from your card issuer; they are required to provide you the option to opt out of the rate hike, allowing you to pay off your existing balances under the previous terms. Read this blog post for some more great information about the “gotchas” involved in the 45 day requirement.
Fee Increases. From annual fees to balance transfer to various other fees, cardholders are already seeing the changes begin to descend upon their accounts. For those with good credit, such as myself, a card with an annual fee is more or less an unfathomable thought – I’ve never had a card with an annual fee (with the exception of a business credit card). But to date, at least one major card issuer (CitiGroup) has implemented annual fees for select clientele, specifically those who are not utilizing their cards to Citi’s designated minimum usage limits. Other banks have implemented fees such as an “inactivity fee” if your card goes unused for a designated amount of time. What can you do to curb these fees? The CARD Act doesn’t restrict the implementation of annual or other fees, but it does requires issuers to provide 45 days’ notice of new or increased fees. To make sure you don’t get blindsided by new fees, again you must read the correspondence sent by your card issuer. If you are like me, and have a number of cards that rarely get use, it may be time to seriously consider whether the need is there for each of these cards, particularly if you learn that annual fees will be tacked on in order to maintain the account. If your credit is good, it may be worth potentially losing a few points off your score to save the cost to hold the account. Read this blog post for more information about minimal annual purchase requirements and associated fees.
Diminishing Rewards. I can attest to this trend, as 5% cash back rewards programs used to be easy to find and plentiful. Now, you are lucky to find 3%, and the few 5% programs that are left have so many restrictions that it is difficult to keep track of what the requirements are. Of course, I have always been amazed that I was able to get such great benefits just for using somebody else’s money temporarily, so perhaps the card companies really are just getting smart. After all, I still plan to use their money even if they cut my payment in half for doing so! What can you do to prepare? Again, read the correspondence from your card issuer thoroughly. Some of these rewards cards may begin charging fees for the perks associated with them, thus you need to be diligent in determining whether the rewards are worth any added fees you may pay to get them.
These are just a few things you can do to prepare and be aware as we approach the next phase CARD Act’s implementation. While the intent of the legislation is positive, many challenges lie ahead for consumers in determining how these changes will affect each of us individually. Readers, please share any additional preparatory tips you might have via a comment!