Watch Out for Credit Card Traps

Picture designed and developed by Liyin the Designer

Credit card holders feel they just won, but the new credit card legislation that President Obama signed into law Friday does not mean that you can start racking up those purchases worry-free. The rules will mostly go into effect in nine months from when Obama signed the bill, while others will kick in as early as 90 days afterward. As the new rules kick in and banks halt the abusive practices this legislation saves consumers from, you are likely to see more practices that are not against new policies that will hurt consumers just as badly, maybe worse. This may have been harmful to the balance we once saw. The banks have to respond to these changes in a way that is financially beneficial to them.

Not every response is positive. When you change a situation someone against you is banking on (pun intended), you often do not like their response. Whether you hold credit cards in order to rack up free rewards points or a debt you hope to one day pay off, you should watch out for several things: new fees, higher interest rates, less generous rewards and fewer promotional offers. It seems a few tips cannot hurt anybody.

Watch out for new fees. The new federal credit policy prohibits over-limit fees unless the cardholder agrees to allow transactions that exceed their limits. To make up for the obvious financial loss, banks will likely introduce other fees, possibly fees the “baby boomers” paid on their first cards but now thought were past history. As an example of the fees cardholders should watch out for, expect fees for rewards programs and possibly even fees for checking your balance.

You should expect annual fees to make a comeback. A few decades ago, annual fees were standard but dropped as competition among card issuers heated up. If you are anything like this author, you looked for cards with limited fees and an annual fee could be the deal breaker. Some issuers will attach annual fees on all their credit cards, while others will tie the fee to spending thresholds, so that only big spenders get away with fewer fees. It may be necessary for you to start racking up those reward points!

Prepare for higher rates. The current industry universal default allows banks and credit agencies to increase rates if a cardholder’s credit score drops or if they make late payments on other accounts. Once the new policies are in place, credit issuers will lose this powerful risk-management tool. Without the ability to act upon perceived risk level, card issuers will just start charging higher rates to everyone. Interest rates will likely go back to the 19% to 20% range for most people. The average variable-rate credit card today charges a low risk consumer 10.79% APR. (This information comes from BankRate.com, a leading industry analyst.)

Grace periods will become a thing of the past. The new legislation requires card companies to give consumers at least 21 days to pay their bills, but it doesn’t require them to offer a grace period, which isn’t the same as the cardholder’s due date though the two usually coincide somewhat. While the due date designates the day by which a payment must be received for the cardholder to avoid a late-payment fee, the grace period is the time during which the cardholder isn’t charged interest. Card issuers may get rid of grace periods altogether so that cardholders who pay their balances off each month will start paying interest immediately after making a purchase. Issuers have for many years wanted to get rid of the grace period on convenience users. It has become a bargaining tactic you will likely not see anymore.

Expect higher introductory rates. Low or 0% introductory APR offers have attracted consumers who posted a balance-transfer or opened up a new card. For example, this author is currently using a card that has three months left of a 0% introductory APR, one of many reasons it was such a wonderful credit move. Banks were able to offer those deals thanks to all the money they made on card users who made a late payment before the offer expired, invoking the bank’s penalty rate of 20% or more. Now that banks will no longer be allowed to increase interest rates on existing balances and all promotional offers have to last for at least six months, these promotions will likely disappear. Even those with perfect credit will likely see introductory rates no less than 6%.

Also expect lackluster or non-existent reward programs. Some companies have already been lowering rewards programs. Once they see lower revenue from penalty fees and interest charges due to the new legislation, they’ll become even less rewarding. Spending thresholds will likely go up so you will have to spend more to earn airline miles, points or cash back. Your creditor may also adopt more stringent rules, such as returning your rewards balance to a lower amount, maybe even wiping it out completely, if you make a late payment.

What can you do as a cardholder? Examine credit card statements and change-in-terms letters carefully. Issuers can currently change terms at any time with 15 days’ notice, but once the new law is in effect, they will have to give 45 days’ notice. You will be notified ahead of time that rates are increasing and you will be given the option to cancel your card prior to the rate hike. Remember that the vast majority of changes in terms are to the benefit of the creditor. If they send you a notice that terms are changing, read over it and find out if there are any changes that impact you in any negative way and act accordingly. When you receive any mailing from a creditor, look over every inch of every slip of included paper. You have heard of fine print. Do not assume that the fine print will be easy to find. Frankly, assume nothing.

Consumers who carry a balance will have to shop around for lower rates, perhaps in exchange for paying an annual fee in order to avoid high interest rates. Cardholders who pay their balances in full each month should not be affected. There is only so much interest that can be charged on purchases that are seventeen days old. To compare rates on new card offers, even preapproval offers, use sites like CreditCards.com, CardRatings.com or CardTrak.com. The only way to avoid interest charges upon disappearance of grace periods would be to stop using credit cards altogether or make sure credit card payments are on time and you have plenty of available balance on your card. In fact, experts advise that you keep half of your card balance unused because future creditors will not be inclined to think you are overextending your finances or living beyond your means.

If you have a low APR offer right now, do everything right and make no mistakes. Send payments in on time and do not do anything to trigger a penalty rate such as exceeding your credit limit. If you can acquire internet access via an SSL secured website, do it. It allows convenience and reduces mistakes. This author prefers internet access to credit accounts and has never had one problem.

If you have any significant miles, points or cash back and worry that your card may scale back its program, it may be smart to redeem your rewards now while there is still such a thing as a free lunch. (My apologies, Mr. President, but you made it the best cliché to use at that moment.)