New Credit Card Law Taking Effect February 22

[bob]

For all the credit card haters out there, I found another reason to hate them...

Responsible Borrowers Will Pay the Price
for New Credit Card Law Taking Effect February 22

Great Barrington, Mass. – When most provisions of the Credit CARD Act take effect February 22, responsible borrowers will become the victims of the “law of unintended consequences,” says the American Institute for Economic Research (AIER).

“Borrowers with solid credit and a history of paying off their credit card charges on time will be treated exactly the same as those with poor credit and a history of late payments under the new law,” said Polina Vlasenko, a research fellow at AIER.

Under the new law, responsible borrowers may expect:

· Higher interest rates and fees than they paid previously;
· Annual fees being introduced or raised;
· Reductions in bonus features, such as rebates or airline miles;
· Credit card companies raising merchant fees, with the merchants passing on this cost to consumers by raising prices; and,
· Some small local stores that stop accepting credit cards or require a minimum purchase to use them.

“While the law limits a credit card issuers’ ability to raise interest rates after a consumer is already a customer, it does nothing to prevent them from charging high interest rates up front,” said Vlasenko. “We’re already seeing many companies substantially increase their rates in advance of the law going into effect.”

According to Vlasenko, the heart of the problem is that, even with credit reports, credit card companies cannot distinguish bad borrowers from good ones with a sufficient degree of certainty. This was not a major problem for lenders when they could swiftly raise a cardholder’s interest rate after finding that borrower to be a higher risk (when he or she makes a late payment, for example). The Credit CARD Act [formally the Credit Card Accountability Responsibility and Disclosure Act] outlaws this “try and see” approach. Without the ability to link interest rates to the behavior of individual borrowers, the AIER expert says, everyone will be treated the same.

“There is a reason why credit cards carry high interest rates. It’s because credit cards provide loans that are convenient for borrowers and risky for lenders,” said Vlasenko. “Borrowers can get unsecured loans up to their credit limit on the spot, no questions asked, and can repay these loans at any time. No other financial product allows people to do this.”

[4jacks]

Might be time for me to close my last credit card account. I've had it open and stagnant for a while.

[bob]

yea we are in the same situation, we have had one hanging around as a "back up", but with our E-fund built up, we really don't need it...

[pochax]

just don't close them right before you need to take a loan or a mortgage...it will temporarily damage your credit (FICO) score.

[bob]

yea, thats the wonderful news - now that we bought our house I intend to never borrow anything for the rest of my life

[pochax]

Here's a recent article on the Do's and Don't's of Closing Credit Card accounts:
http://www.creditkarma.com/article/ClosingOldAccount

Closing old and unused credit accounts on your credit reports can help you avoid unnecessary fees and guard against identity theft. It can also cause your credit score to drop if you are not careful. Here are a few do's and don'ts for closing those dormant accounts:

Do...

Consider closing unused and idle accounts. These accounts could be charging you unnecessary fees and are often targets for identity thieves. Close the accounts with annual fees or the highest interest rates first.
Check your credit reports online to see the status of your accounts. Look for late payments, high balances and signs of identity theft. As a bonus, checking your credit report can save you some research time by providing you with contact information for each of your creditors.
Be aware that you can cancel accounts that have an active balance. You can ask your creditor to close the account to new charges and continue paying down the balance each month. This may be a good way for heavy credit users to prevent new spending while they are reducing their balances but watch out for hidden fees.
Keep four to six credit accounts open. This will keep your credit score and debt balances healthy. Signs of active and responsible credit use are viewed positively by creditors
Designate one card for regular use and try to pay the balance in-full each month. Reserve the other cards for emergencies only so that you are not tempted to overspend.


Don't...

Close the oldest account on your credit reports . This could cause your credit history to appear shorter and could harm your credit score.
Just throw away old cards and expect your accounts to close automatically. The safest way to close an account is to send a certified letter to the customer service department of the credit company. You should receive an account closing confirmation letter in 10 days.
You shouldn't be pressured to cancel several accounts all at once. Gradually paying down and closing accounts may be the best plan if you are unsure about the impact on your credit score or the amount of debt you need to carry. If you want to cancel numerous credit accounts, spacing the closures over time will reduce the chance of attracting negative suspicion from potential creditors.
Avoid over-consolidating balances onto one card. If your credit balances rise to above 35% of your available limits, you may see a drop in your credit score.
Don't forget to check your credit reports for updates and errors after you close your credit accounts. Wait 30-60 days for the creditor to report the closed account and the credit reporting agencies to update your records. While the accounts and their payment histories will stay on your report for 7 or more years, they should be marked as "closed."

[bob]

thanks Pochax, that is good info...

[thewisebuck]

So, those people who are paying their debt on time will now be treated like borrowers who are late. This is how credit card companies have decided to raise money in an environment where people are defaulting on their balances more than ever. All the more reason to get out and stay out of debt. Thanks for the heads up!

Mike

[rk123]

Yup, regardless of the new regs, credit card firms will always find ways to find new charges.