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Making Your Own “Credit Card Reform” Act

The chaos in the card market today demands your attention. Manage your card wisely with our suggestions.

In the last several months, banks have been rushing to increase fees and interest rates—along with a myriad of other chargesbefore the Credit CARD Act takes effect, which will freeze all these sundry charges at their current level.

If you have a credit card—or even if you don't—the chaos in the card market demands your attention. On May 22, 2009, President Obama signed the Credit CARD Act of 2009. The act banned retroactive rate increases, required that terms remain stable for the entire first year of a contract, that card holders be given a reasonable time to pay monthly bills and so forth. The law was to become effective on February 22, 2010.

Soon after the legislation was announced, credit card issuers leapt into action, increasing existing fees, adding new ones and stuffing mailboxes with new contracts in tiny print announcing immediate changes. For years, banks pushed credit on consumers with little regard for their ability to repay. The longer it took for a cardholder to repay the debt, the more money the bank made. That was until too many consumers stopped paying. Then the banks decided they needed to tighten credit because they lost too much money to debtors who defaulted on their loans.

In one notable case profiled on Good Morning America, an Atlanta businessman had his credit limit lowered by American Express because he shopped at a Walmart store. The New York Times reported that Citibank raised the rate of a 91-year-old Florida woman to 29.9%. The woman's daughter asked that her mother's bills be forwarded to her so she could pay them. In the transition, two bills went unpaid.

Recent surveys by the Federal Reserve Bank and by Pew Charitable Trusts found that these practices are widespread. The Fed said that 50% of the banks responding to a survey were increasing interest rates and reducing credit lines on borrowers with good credit scores. And 40% said they were adding more fees.

The Pew study found that the 12 largest banks, which issue more than 80% of credit cards, continued to use practices that were considered "unfair or deceptive" by the Fed.

The changes sparked such an outcry that on November 4, the House of Representatives voted 331-92 to make the law effective immediately via the Expedited CARD Reform for Consumers Act of 2009. As yet, the Senate has not scheduled a vote on the measure. So for now, we're on our own.

What Should You Do?
1. Carefully read every communication you receive from your credit card issuers. A bank might announce, for instance, that it is raising the rate on the balance you already carry. Be on the lookout for every change announced in the mailing. Don't be fooled by changes that are introduced "for your convenience," or "to improve services offered to you." In the end, these changes can often end up costing you more. Some banks are adding “inactivity fees” or “insufficient activity fees” to cards that are not used often enough.

2. Don't cancel a card in haste. Not so long ago, experts were telling us that we should just move on to a better and lower-cost card if we didn't like what we had. That advice no longer holds. Credit is becoming much harder to get. I believe that banks, if they are pushed to the wall on the new regulations, will simply cancel "mediocre" customers, even those with above-average credit scores. Be sure you have the credit you need before dropping a card.

3. Don't cancel a card with an outstanding balance as the issuer might raise your interest rate before you can pay off the card. If you do want to cancel a card, pay off the balance before you cancel. You can cancel most cards over the phone, but be sure you request that the issuer sends you written confirmation that the account has been closed.

4. Check your credit record annually and make certain that it’s correct. If you have requested that a card be canceled, your report should say that it was closed "by cardholder request."

5. Collect the information on all the cards you have including the fees, interest rates, grace periods and anything else that affects your payments. That way, if you ever see something unexpected on your statement, you’ll have the terms available for easy reference.

6. Re-evaluate reward cards and other special cards. Experts are predicting that fees will be going up and rewards will be going down on these cards. Also be sure that you know if/when any points or miles you’ve accrued may expire.

7. Don't go over your credit limit, pay late or pay only the minimum amount if you can avoid it. These are all reasons that card issuers may use to increase your rate.

8. Look for a card from a credit union, association or other affinity group. These organizations are often able to offer better terms than banks.

Going forward, it will be more difficult and more expensive for Americans to use credit. By managing your credit wisely, however, you can ensure that you always have the credit you need without paying expensive fees and high interest rates.

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