Credit CARD Act Fallout: Get Ready for Higher Rates and Lower Limits

Since August 2009, different rules associated with the Credit CARD Act in the U.S. have been coming into existence. The final rules from the Credit CARD Act will become binding next month. And, while consumers have received some protect from some credit card issuer abuses, there are still some concerns. The biggest concerns come from what credit card issuers are still allowed to do. And with some of the CARD rules cutting into revenues, issuers are likely to look for ways to boost their own revenue. Here are some of the (presumably) unintended consequences of the Credit CARD Act:

1. Higher interest rates: Many Americans think that the Credit CARD Act makes it impossible for issuers to raise interest rates. This is not true. Issuers cannot raise interest rates on existing balances (unless you are 60 days late in paying), but they can raise rates on new balance if they offer 45 days advance notice. Check your mail; it is likely you will see a change in the way your credit card rates are figured.
2. Lower credit limits: Some credit issuers are slashing credit limits. Your credit card issuer doesn’t even have to let you know in advance. The same is true of closing your account altogether. Those at most risk for account closures and lower credit limits are those who act responsibly. I’m going to say that again: If you act responsibly, paying off your balance each month, you are at greater risk for lower credit limits. If you use your card only a couple times a year, paying it off as you do, you are at a greater risk of having your account closed. The truth is that credit card issuers consider a “good” customer one who carries a balance, and can afford to pay the minimum balance month in and month out.
3. New fees: There are rules now that limit your late payment fee to $25, and that do not allow inactivity fees. However, some credit issuers are finding new fees to charge. Watch out for annual fees and reward redemption fees, which are making a comeback. Also, note that caps on late payment fees don’t prevent credit card issuers from raising your balance transfer fees, over the limit fees, cash advance fees and foreign purchase/transaction fees.

Your Credit Score

Keeping track of what is going on with your credit cards is important beyond just knowing that your credit card terms are changing. What your credit card issuer does can also affect your credit score. One of the biggest impacts is likely to come from account closures and reduced credit limits. Because part of your credit score depends on your available credit, a reduction in what you have available can damage your score to some degree.

If you are concerned with keeping your credit account open, and want to increase the chances that your credit limit will be maintained, you may have to strategically carry a balance for a couple of months. You might charge a reasonably small amount on your card, and then pay if off over two or three months instead of voiding the balance all at once. You may have to pay some interest, but if a lower credit score — due to a lower credit limit — costs you hundreds of dollars because you end up with a higher interest rate on your auto loan, you might have wished you paid the relatively small $10 to $20 in interest.

In the end, U.S. consumers are faced with some tough choices. Interest rate changes may not matter to those who pay off their balances each month, and closed accounts may make no difference to those who do not plan to buy a home or a car by borrowing money. However, for those who plan to use credit in the near future, the likely fallout from the Credit CARD Act could have larger consequences.