New credit card legislation coming soon – interest rates rise, limits go down

As most of you know, I don’t like debt – and try to avoid credit card use – and have been in a race to get all my debts paid off. After the recent purchase of our house we have added a mortgage to our outstanding student loan debt. Both have relatively low interest rates, but I want them paid off ASAP! (Here’s why)

But we all know that racking up Christmas debt is really easy to do. But this year because of the new credit card legislation (starting February 2010) it is particularly a bad idea. Bob Brooks has a couple reasons why it is extra important this year to avoid credit card debt it if at all possible.

According to Brooks, consumers who carry their credit card debt over to February of 2010 will be in for a big surprise because of…

1. Interest rates: In response to the new credit card legislation that will go into effect February 2010, credit card companies have raised credit card rates as well as changed them to variable rates.  ANY new debt created in this environment could end up being extremely expensive.  The problem is that those variable rates are tied to a benchmark, and that benchmark has nowhere to go but up.  As a result, the cost for holding debt for consumers will greatly increase over time.

2. Reduced credit limits: In response to the new credit card legislation, credit card companies have sought to reduce their own risk by reducing consumer credit card limits.  As a result, credit scores can be drastically affected.  One aspect of credit scoring is the credit utilization ratio.  This formula looks at total overall credit that has been issued to a consumer and the amount of that credit the consumer is utilizing.  An ideal credit utilization ratio is less than 30%.

For example, take the consumer that has $10,000 in total credit limits.  If that consumer has 8,000 of debt on those credit limits, then the consumer is utilizing 80% of their credit limits.  If the credit limits in this case are lowered to $8,000, their credit utilization ratio becomes 100% which would have a much more negative effect on the credit score.

If you have a lot of credit card debt that you want to get paid down, this new legislation going into effect might just be enough incentive to start attacking it. If you are up for it you can start with these 7 steps to get out of debt or you can try out negotiating your credit card interest rates – I’ve been hearing that credit card companies aren’t negotiating as much these days, but it is still worth a shot.

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  1. Nicole @ Rainy-Day Saver

    I was just talking about this yesterday. I have a credit card that says my low interest rate of 7.9% will become a “promotional” rate come January — but they’ve decided to extend this “promotional” rate for me until June. Good thing card will be paid off next month! Although same creditor did just raise (actually, double) my credit line for the first time since I got the card in 2003.

  2. Bob

    Wow. that is pretty scary – I have heard stories like yours quite a few times now. I can’t help but think behaviors like that from the credit card companies are just going to get consumers frustrated enough that they stop using them – time will tell, I guess…

  3. bondChristian

    Thanks for the update. I didn’t know about the credit card news. I currently don’t have any credit cards, but I’m sure the consequences of this change will eventually shift a lot of other things as well.

    -Marshall Jones Jr.

  4. PennyStocks

    Thanks for the updates. These quick changes in credit card rates can kill you financially. I refuse to leave a monthly balance but not everyone can do that.