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New credit card rules add accountability

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Personal Finance

In a world where shopping online and booking a hotel or a rental car usually demands plastic, few people can survive without a credit card.

But vast changes in credit regulation coupled with a souring economy turned 2009 into the most turbulent credit year in decades, with a record number of rate hikes, consumer cancellations and changes in fees, terms and credit limits. And experts say there’s more in store for 2010.

“2010 is going to be the year of accountability,” said Adam Levin, chairman and co-founder of Credit.com, a credit-shopping website. “Credit card companies are going to be more accountable to consumers, but consumers are going to have to be more accountable too.”

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What should you expect in 2010, and how can you put yourself in the best position to lessen the pain, or even profit from the changes?

First it’s helpful to recap what’s already happened, said Bill Hardekopf, chief executive of LowCards.com. That’s mainly because many of the anticipated changes are linked to a consumer protection law that was passed earlier this year but is taking effect in stages.

In May, Congress passed the CARD Act -- short for the Credit Card Accountability, Responsibility and Disclosure Act of 2009. But legislators gave banks time to acclimate to the new rules by putting in three effective dates. The first was in August, the second is in February and a final rule that affects gift cards applies next August.

What happened last August? Credit card issuers were required to give consumers 45 days’ notice of rate hikes and bill people at least 21 days’ before their payments were due. That was intended to assure that consumers were given adequate time to pay without getting hit with late fees.

In addition, consumers got the ability to “opt out” of a rate hike. The catch on this opt-out provision is that when you say no to the higher rate, the bank can close your account and double your minimum monthly payment, Levin said.

If you do elect to close the account, you can’t be forced to pay off your balance all at once. But the new law does allow banks to set up a schedule that guarantees you’ll have paid off your debt within five years. On the bright side, you pay off the debt at the old interest rate, not the higher one that the bank wanted to impose.

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But most significant changes go into effect early next year.

As of Feb. 22, if you have a consistent history of paying on time your rates cannot be increased on outstanding balances except when a “teaser” rate expires or when you have a variable-rate credit card.

If a credit card company hikes rates on a fixed-rate card, they are only allowed to charge the higher rate on new charges.

Your rate can be increased if you’ve been irresponsible about your credit use, though. If your payment is more than 60 days late, the issuer can charge a penalty rate that could be vastly more expensive than what you were paying previously and that rate can be applied to an existing balance. However, the credit card company must reinstate the lower rate if you make at least six months of on-time payments.

And then there are those fees for exceeding your credit limit. You cannot be charged an “over-limit” fee unless you affirmatively opt-in to a program that will allow your card issuer to accept charges that put you over your credit limit. If you don’t opt in, the bank will simply reject any such charges.

All consumers also must be told how long it will take to pay off their credit balances if they make only the minimum required payments.

Youthful borrowers -- those under 21 -- will not be able to get credit cards unless they have a co-signer or can show that they have income to pay their own bills.

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Issuers of “subprime” cards -- those going to people with bad credit histories -- may not charge customers upfront fees to obtain the card that amount to more than 25% of the credit limit.

These changes have already spurred a flurry of activity. In an effort to maintain their ability to change rates, banks have been converting fixed-rate cards to variable-rate cards and they’ve hiked rates on millions of customers.

In addition, some 58 million individuals have had credit cards canceled or their credit limits cut, said Craig Watts, spokesman for Fair Isaac Co., the makers of the FICO score. These cuts aren’t being imposed only on bad risks, either, Watts said.

The typical cardholder whose credit limit was affected had an excellent credit score, ranging from 760 to 770.

Meanwhile, credit cards offered to high-risk borrowers are being repackaged. In the past, these cards often charged fees that were nearly as high as the credit limit. First Premier Bank, for instance, offered a card with a $250 credit limit that charged $256 in upfront fees. In anticipation of the law, the bank cut the fees but is imposing a 79.9% interest rate on charges -- the highest some experts say they’ve ever seen.

In the coming year, Hardekopf expects credit card companies to send out a raft of mailers that extol the virtues of over-limit protection.

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Because banks won’t be able to enroll you (and charge a fee if you use it) without your consent these offers are likely to sound compelling, when in reality all they’re doing is getting you to accept a “service” that lets you overspend at a high cost.

“Credit card issuers are brilliant marketers,” Hardekopf said. “They’ll make the advertised offer sound awesome. But, hopefully, we have gotten more financially savvy and know to read through the terms and conditions.”

Banks also are likely to institute a number of other changes to their credit card agreements, such as instituting annual fees and charging you for not using your card, Levin predicted.

Banks are also likely to start revamping their “rewards” programs to make them less generous. However, instead of making these notices stand out in the mail, he expects banks to package them so that they look like junk mail.

Read anything and everything that comes from your credit card company this year, he advised. Even the junk mail that you’d normally toss without a glance may just include some important change to the terms and conditions of your agreement.

Finally, experts noted that credit card companies are competing for customers again, sending out rafts of pre-approved offers. But the only people getting the offers are those with excellent credit scores. Those who have so-so credit will continue to have few -- and increasingly unattractive -- options.

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The experts’ advice: Pay close attention to your credit, paying your bills promptly and monitoring your score.

“If you are able to improve your credit score from good to excellent, you open up a world of options,” said Kenneth Lin, chief executive and founder of CreditKarma.com.

Adam Jusko, founder of IndexCreditCards.com added: “Credit scores have always been important, but they are going to be even more important now.”

The age-old advice to pay off your cards each month and never carry a balance if you can help it is also more important than ever, experts said.

“If you’re paying off your card every month,’ Jusko said, “you don’t care whether the issuer has raised your rate.”

kathykristof24@gmail.com

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