Earlier this year, Congress voted to hold the credit card industry accountable for their stringent, often questionable card management practices, especially in the areas of fees and interest rates. Now, in a race to beat the clock, some card lenders are raising minimum payments JP Morgan Chase (Stock Quote: JPM) and increasing interest rates (Citigroup: Stock Quote: C) before the new rules go into effect.
Effective next month, Chase has sent out notices to customers that minimum monthly payments would rise from 2% to 5%. Chase isn’t exactly using a velvet glove here –customers can’t even opt out of the minimum payment because it doesn’t impact a cardholder’s interest rate.
Meanwhile, Citi has jacked up credit card rates for up to 15 million U.S. cardholders, joining a burgeoning number of US credit card companies who are aggressively hiking rates and minimum payment amounts, and cutting back on things like credit limits. Citi, Bank of America (Stock Quote: BOA); Discover (Stock Quote: DFS) and Chase are among major carriers who have either raised rates or increased minimum payments, or who slashed card limits in 2009.
The timing is hardly coincidental. On May 22, President Obama signed into law H.R. 627: the Credit Card Accountability Responsibility and Disclosure Act of 2009. Nicknamed the “Credit Card Bill of Rights”, the bill toughens consumer billing standards by credit card companies and restricts how they can raise fees and hike interest rates. For example, the bill stops card carriers from increasing interest rates on existing balances unless the borrower is at least 60 days late paying a bill. In addition, if the credit card customer pays on time for the following six months, the card company would have to restore the original rate.
But H.R. 627 has one big loophole – it does not take effect until July, 2010. That leaves a nine-month window that card companies are increasingly leveraging to sock it to card customers before the tougher rules go into effect. The card carriers say that in an environment where more and more cardholders can’t pay their bills, they need the money (credit card customer charge-backs rose to a record 10.44% in June, Fitch Ratings reports).
So, what can you do to fight back?
Well, you can pray that the Federal Reserve will step in and order card companies to stop hiking rates and fees (a highly unlikely scenario, but the Fed has the authority to do so).
Better to opt out of your credit card account before the amount you owe climbs any higher. Yes, closing your account down negatively impacts your credit utilization rate (a barometer credit rating agencies use to peg your credit score). But faced with the possibility of not being able to pay your card bill (which will have a much larger impact your credit score, and not in a good way), opting out puts a stop to rising rates and fees, and stops the bleeding so you focus strictly on paying your credit card bill.
Or, if you can manage it, opt instead for a balance transfer to a new card with a lower interest rate. If you have good credit, you can swing a pretty good deal with a balance transfer. By keeping your old card open and opening a new line of credit, you’ve expanded your credit utilization rate, and potentially saved your credit score, and gotten a lower rate on your new credit card.
Seeing your credit card manipulated by the card companies is frustrating. Watching Congress pass a bill that gives card companies nine months to gouge more cash from your back account is worse.
Mitigate the damage by being creative – and by paying all of your card bills on time.
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