Credit Card Alert: Read the Fine Print

photo credit: xJasonRogersx

Credit card legislation and new Federal Reserve rules which passed last year are consumer friendly, but don’t expect credit card companies to make things easy for their customers. Some of the changes have already gone into effect, but the majority of the them will take effect on February 22, with more scheduled for this summer. As these deadlines close in, you can expect banks to step up efforts to seize advantages before the rules change. According to Adam Levin, co-founder and chairman of Credit.com, the banks’ philosophy toward their customers is, “It’s not our job to teach you the law; it’s our job to comply with the law.” Stated differently, they will keep the letter of the law while sidestepping the spirit of the law. You can therefore be expecting some mailings which could resemble junk mail and read like gibberish. Watch for such mailings and be sure not to pitch them; ignoring the fine print could cost you money.

According to the Wall Street Journal, these are some things you should be watching for:

Did your interest rate go up?

Many companies have been raising rates to as high as 29.99%. Do you have to accept that change? No. You have the right to “opt out”, which effectively cancels your card for new purchases while continuing to pay off the balance at the old interest rate.  This could also affect trying to do 0% balance transfers on your cards.

Why are credit card companies raising rates before the changes go into effect? Because, if they notify you before February 22 and you do not opt out, you will be stuck with the higher interest rate for both new and existing balances. After the Credit Card Act goes into effect on February 22, any interest raises affect only new transactions unless you are at least 60 days behind in your payments. Their ploy of raising rates now is to make you pay the higher rates on all existing balances.

You may be asking, “Will opting out hurt my credit score?” Possibly, but what is more important to you: a slight drop in your credit score or paying more money (all interest) to the credit card company? Suppose you owe $5,000 on your card and you are paying $250 a month. The current interest rate is 11.99% and the company informs you that they are raising it to 24.99%. Opting out will keep that interest at 11.99% until the balance is paid off, saving you over $900 in additional interest fees compared to the 24.99% rate. Stated differently, would you pay $900 in order to avoid a slight dip in your credit rating? I hope not.

My thoughts? Don’t worship your credit score scale or check your credit score too often. It is only a number which allows you to go into debt. If you avoid debt, your credit score has little relevance to your life.  Not sure what your credit score is? You can always get a free FICO credit score.

Has your credit limit been lowered?

Starting in February, the new law will not allow credit card companies to charge fees (commonly up to $39) for exceeding the credit limit unless the borrower “opts in”. If you do not opt in, your card will be rejected when you try to charge a purchase which will put you over the limit. I like this rule: it forces consumers to pay attention to what they charge. But it could create problems if you bust your limit with a hotel stay or while renting a car.

Whether you have opted in or not, you can avoid fees – or rejection – by setting up e-mail and text alerts with your credit card issuer to notify you when your near your limit.

Is the bank changing how it handles overdrafts on your debit card?

New credit card rules that take effect this summer will not allow banks to charge overdraft fees on debit card transactions unless you opt in. These fees, marketed by banks as conveniences, normally cost consumers up to $35 per overdraft. Not opting in would presumably cause any debit card transaction that creates a negative checking account balance to be refused. Again, I like this idea because it forces the customer to be responsible for knowing his checking account balance at all times.

If tracking your checking account is problematic, you should set up email and text alerts to notify you any time your balance drops below a set threshold.   Another idea:   you can link your checking account to your savings account as a backup for mistakes.  Yes, there will be a small fee (maybe $10) involved if this backup is activated, but $10 is better than a $35 overdraft fee.

Concluding thoughts

While the new laws will benefit consumers, now is the time for vigilance. It is your job to know the laws and to keep a wary eye on your credit card correspondence, especially between now and February 22 when many of the rules kick in.

One easy alternative to watching for credit card trickery is to cut up your credit cards. Yes, I really did say that and I challenge you to consider doing so. My wife and I have not owned a credit card in nearly five years and we love the peace in knowing that we no longer do business with slimy companies who have proven themselves to be less than honorable.