Part 2 of 2

How to protect yourself.

• Keep in mind the interest rate increases won’t affect you if you’re not carrying large balances.  Going from 9.99% to 14.99% isn’t going to really impact your wallet if you’re already living within your means rather than living on credit.
  • Be aware of the fine print on your credit cards.  If you know that the new card with the 0% introductory rate for the first 12 months is going to instantly jump to 24.99% if you’re even a day late during that time frame, you’ll probably be a little more careful about making sure the payment is sent on time.
  • Pick cards with lower long term rates rather than teaser rates that expire and then go up.  The longer you have a card the better it is for your credit score, so you want cards that will still be useful to you 2 or 3 years down the road.
  • Read the mail you get from your credit card issuers.  I too have been guilty in the past of just finding the payment due and ignoring the rest of the information stuffed in the envelope, and I’ve been burned by it.  The banks are notorious for slipping in information about rate changes or changes in your terms of service.  Stay informed, that way you’ll be able to change your spending habits before the card goes to 99.99% next month.
  • Cash advances…  just don’t do it.  The interest charged on cash advances is always significantly higher than the rate charged on regular purchases, and to add insult to injury, when you pay your bill each month the credit card companies are going to apply your payment to your normal purchases, not the higher interest cash advance balance, first.
  • This one may be obvious, but PAY ON TIME.  Don’t count on the postal service to get the payment to the bank in a timely manner, send the payment early to be safe.  Remember that until the new laws are being enforced you’re still subject to universal default, so that one late payment could cause the interest rates to go up on all your cards.
  • Along with the obvious pay on time, there’s also stay under your credit limit.  Over limit fees and the increased interest rates are only getting worse and worse, so do your best to avoid them completely.
  • Pay in full to avoid interest.  Credit cards should be used as a convenience, not a replacement for income, so if you’re spending within your means this should be easy to do.  If you’re not living within your means, it’s time to draw up a reasonable budget and figure out what it’s going to take to get your finances in check.
  • If you find yourself using your cards more than you should just to make ends meet, don’t be afraid to ask for help.  Feel free to give our experts a call at 1-888-WHY-FICO.  We can give you the unbiased advice based on our experience that will help you get on track.

Part 1 of 2

I’ve spoken a lot recently about what credit card issuers are doing before the Credit Card Reform Act goes into effect next February. They’re justifying their practices by saying that their revenues are suffering with the ever increasing unemployment and default rates. Sadly their solution is to penalize the paying customers. Here’s a list of specific things to watch out for in handy “10 things to watch out for” format.

• Increasing interest rates. The phrase of the day with the card issuers seems to be “any time any reason” price changes. This isn’t just happening to sub-prime customers either. One of the major banks just raised the interest rate on their low risk prime cards to 29.99%. Interest rates like this have been ridiculous in the past even on sub-prime cards. Rates for sub-prime cards are even worse.

• Penalty rates are going up. Those are the rates that are put in place if you’re late, go over your limit, etc.

• “Unprofitable” accounts are being shut down or getting their limits reduced. In other words, people that pay their cards off each month, denying the card issuers interest and penalty fees, are being closed down. The issuers want to keep the people that carry balances and are late here and there.

• Cash advance and balance transfer fees are skyrocketing to all time highs. The days of no cost, 0% interest balance transfers are long gone, and those “convenience” checks are going to significantly increase the real cost of your purchases.

• Annual fees are being added and increased. Last year less than 20% of credit cards had annual fees, but it’s predicted that by February nearly all credit cards from the big banks will have them. The cards that already had annual fees are seeing them doubled, tripled, even quadrupled.

• Fixed rates are being changed to variable rates. In the past with fixed rates meant that if the prime interest rate went up your rates remained the same, decreasing the profits of the banks, but now if the historically low prime interest rate goes up (which it will since it can’t really get any lower), your rate will go up. If prime is 3% and your rate is prime +24.99%, and prime goes to 6% your rate goes to 27.99% instead of staying at 24.99%. Oh, and the best part, there’s no provision for the rates to go back down. So if prime goes back to 3%, your interest rate doesn’t go back to 24.99%.

• The banks are changing the terms of their special fees to make them all inclusive. For example, banks charge a special fee for “international transactions” in other forms of currency, but they’re changing the terms so those fees apply even when the transaction is still in American greenbacks.

• They’re making rewards an endangered species. Cash back rewards are being lowered or eliminated while things like airline miles are getting tougher restrictions making it harder, if not impossible, for people to use them.

• The banks are getting creative and creating new fees in addition to the old ones. Not using your card? Here’s an inactivity fee. Not using it enough? Have a low activity fee.

• The banks are closing cards with no notice. That’s means you might not even know until you go to use the card and your transaction is embarrassingly declined.

I’ll follow this up tomorrow with some suggestions on how to protect yourself.

With the meteoric rise in credit card interest rates and the plummeting credit limits I often wonder why more people don’t turn to credit unions for their credit needs. There was a time when going through the big banks for credit cards made a lot of sense—back when they’d offer no interest on balance transfers for 12 months or more, or when their incentive programs were actually a savings compared to their rates. Those days are long gone though as the big banks offer less and less attractive rates and incentives by the day.

The advantage to credit unions is that they are, technically, nonprofits run by their members. This means they can offer interest rates and fee schedules far below those offered by the big banks (you know, the for profit ones). Many might contend that credit unions have membership limitations, such as you have to work for a certain company or live within a certain geographical area. In my experience, and I’m speaking as someone who has dealt exclusively with credit unions since I opened my first passbook savings account over 2 decades ago, the membership limitations they have always contain loopholes. If you go in and tell them you want to open an account, they’ll find a way. They’ve earned my loyalty over the years, and I’m not speaking of any one particular credit union because I have opened accounts at 6 different ones due to relocations, because they have universally offered me better interest rates on car loans, home loans, checking accounts, lines of credit, and credit cards. In addition they have just plain treated me better, like a valued customer and not just a number.

I found a chart in a recent Pew Report that shows clearly the differences in rates between the big banks and your average credit union. Look it over and keep them in mind if you’re looking to minimize the amount you pay in interest, fees, and penalties.