Protect yourself from a credit card backlash

The most sweeping credit card legislation in years is good news for cardholders -- but banks will respond by charging you more and giving you less. Here's what to do about it.

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What the legislation means for you
The Credit Card Accountability, Responsibility and Disclosure Act will go into effect in phases over the next year. The 13 key mandates:
  • As of August 2009 ...
1. Statements must be mailed 21 days before bill is due (up from the current 14).
2. Issuers have to give 45 days' notice (vs. 15) before increasing interest rates and fees.
  • As of February 2010 ...
3. Issuers can no longer raise rates on an existing balance, unless payment is more than 60 days late or a teaser rate expires.
4. Teaser rates must be in effect for at least six months.
5. Except for expiring teasers, the rate on new purchases can't be hiked in the first year.
6. Payments in excess of the minimum owed must first be applied to the balance with the highest interest rate, and then to other balances in descending order.
7. Over-limit fees can be applied only if a consumer opts in for approval on going over the credit limit.
8. Applicants under age 21 must have an adult co-sign, or show proof of income for approval.
9. Issuers can't offer sign-up gifts on or near college campuses.
10. Issuers can no longer practice "universal default" - that is, raise your rates if they learn that you were late on another account.
11. Issuers must indicate in statements how long it will take to pay off a balance (and the total cost) if you make only minimum payments.
12. In calculating finance charges, issuers cannot average in daily balances from the previous billing cycle.
  • As of August 2010 ...
13. Cardholders assessed a penalty APR for late payment can reclaim the lower rate if they pay on time for six consecutive months.
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NEW YORK (Money) -- There's plenty to like about the credit card reforms President Obama signed into law this May.

For example, starting in February, your card company won't be able to raise the interest rate on an existing balance. Payments will be applied first to the portion of your balance with the highest rate. And if you miss a deadline for one card, the issuer of another can't hold it against you. All major victories for consumers.

But this doesn't mean you won't pay in other ways. Federal regulators recently estimated that the country's largest banks will suffer a total of $82 billion in credit card losses through 2010 as a result of the recession. And that has the institutions anxious to concoct new methods of creating revenue and limiting risk, says banking industry consultant Robert Hammer.

It also has them leaning heavily on some old standbys. After all, the law doesn't prevent banks from hiking rates on new purchases. Or zapping credit lines. Or yanking rewards. What's more, until the bulk of provisions go into effect this winter, the newly outlawed practices will still be in play.

Bottom line: You'll have to set your own rules, and not just rely on the government's. If you want to protect your plastic and all of its benefits, these six guidelines are a good place to start.

Don't: let your cards collect dust.

Chances are, you favor a particular card. But if you've got another idling in your wallet, now's the time to show it some love. To limit risk and expenses, "a lot of issuers are closing accounts because of inactivity," says John Ulzheimer of Credit.com. And they're doing so even to model cardholders.

Obviously, having a card canceled hampers your access to credit. But having less credit can also mean a lower credit score. Bad news all around.

To avoid this scenario, use each card at least once every three to six months. Just buy something small and pay it off. (Issuers will be placated by the fees they get from retailers when you swipe.) If you have more than two cards -- in reality, that's all you need -- rotate them, using only two in any given month.

Do: keep charging in check.

Not only are creditors canceling cards you don't use, they're also cutting limits on the ones you do. Banking analyst Meredith Whitney expects lenders to reduce available credit by $2.7 trillion through 2010, and a recent Credit.com survey concluded that 14% of Americans have already been victims.

Issuers have been targeting customers based on, among other things, location, spending pattern, and debt-to-credit ratio. This last one -- which refers to how much of your available credit you're using -- is easy to manage. You'll especially want to keep it in check to avoid a vicious cycle: A high ratio results in a lowered credit score, which also triggers credit line cuts.

"Ideally you'd use less than 10% of your limit," says Ulzheimer. That's stingy -- $500 on a $5,000 line. But you can safely creep up to 20% on any one card and in total unless you're applying for a loan soon and want as pristine a profile as possible. (In that case, zero out your cards and put them on ice for two months.) Don't go over the 20% line even if you pay in full every month. Issuers report the statement balance to the bureaus, so it looks as if you're utilizing that amount.

And if your limit is cut anyway? Banks haven't been receptive lately to consumers' requests for line reinstatements. So instead, open a new card (see the next point) to extend your available credit.

Don't: wait around for a rate hike.

About one in five consumers have recently seen the annual percentage rate (APR) on a card spike, according to Credit.com's June survey. Big banks -- hit hardest by losses -- have been especially eager to raise rates, says Curtis Arnold of CardRatings.com. You're likely to see them hurriedly hiking the APR on existing balances before February, and continuing to juice longtime cardholders on new purchases even after, he predicts.

So if you carry a balance and have a credit score of 730 or above, move your big-bank card into secondary status and rotate in a regional bank or credit union card, Arnold advises. Because such institutions use stricter underwriting standards, they offer lower rates and rarer hikes. The average major bank card is running 13.76%, says Arnold. But Arkansas-based IberiaBank FSB is offering a Visa Classic starting at 6.25% (800-980- 2265); NIH Federal Credit Union is advertising a Visa Platinum Rewards card at 8.9% (800-877-6440).

For more regional bank options, search CardRatings.com. For credit unions, use Bankrate.com's state-by-state list, then visit the unions' sites directly. (Most have lenient membership requirements, says Arnold.)

Do: force them to remind you.

With creditors expected to lose significant interest revenue as a result of the legislation, they'll have to increase penalty rates and fees, predicts bank advisory firm R.K. Hammer. Already in 2008 the average penalty APR was 26.87%, with some as high as 32.99%, per Consumer Action. And the average late charge at the 10 biggest banks was $39, R.K. Hammer reports.

Think you're too responsible to be late? Guess again. Issuers have been shrinking grace periods, and thereby shifting due dates by a few days, says Bill Hardekopf of LowCards.com.

To add insult, banks have been raising minimum-payment amounts, and sticking customers with fees when they underpay. Avoid the double whammy of fees plus penalty rates by setting up e-mail or text message alerts notifying you when your bill is due and what minimum is owed. (You can usually sign up on your issuer's website.) The alerts will keep up with account changes, even if you can't.

Do: reassess your rewards.

Issuers have been scaling back rewards for a while now; and industry insiders expect the trend to accelerate as companies try to cut costs. It's unlikely banks will pull the plug completely, given their need to lure new customers, says Emily Peters of Credit.com. But you can expect changes in accrual and redemption.

Discover, for example, recently reduced its cashback bonus so that cardholders earn just 0.25% on annual purchases up to $3,000 and 1% after that. (Previously, a middle tier between $1,500 and $3,000 paid 0.5%). Citi doubled the ThankYou points required to get some airline tickets, and moved up the expiration on other points.

The best way to protect your rewards? "Use them before you lose them," says Hardekopf. In other words, cash them out frequently. That's especially true of miles and points, which are getting harder to redeem anyway. In fact, you'll probably get better value with a cashback card that pays out frequently; the Schwab Invest First Visa (866-724-9223) returns 2% on all purchases and pays out every month.

Don't: miss changes that'll cost you.

As of this month, issuers must give you 45 days' notice before changing the rate or other terms on your card (vs. 15 days before). Since the new terms will likely be less wallet-friendly, it's crucial that you pay attention.

Problem is, there's no standard way issuers must notify you. So even the most vigilant cardholder can miss an important change. That said, the factors likely to have the biggest impact are credit limits and interest rates, and there's an easy way to keep up on these: Verify them on every statement. Your limit is usually near the top, and your rate is typically listed among the finance calculations. New law or no, it's still up to you to protect yourself. To top of page

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