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High Interest Rate: No Small Change

Nancy Trejos

This is a big week for the credit card industry--and the 78 percent of families who have cards.

Tomorrow, the Senate is scheduled to vote on a bill that would ban many industry practices that consumers have been complaining about for years such as arbitrary retroactive interest rates.

If approved, the changes would go into effect nine months after President Obama signs it into law. There’s a similar House bill being considered. That would go into effect 12 months after signing. Either way, it’ll be a while before anything changes. In the meantime, business will probably operate as usual. And lately, it’s been operating this way: Many card companies have been losing money, and they’ve been making up for it by increasing interest rates and fees and reducing credit lines.

I’ve talked to a few consumers who have had one or both of these actions taken against them even if they’ve made their payments on time. You have probably already received a letter from your card company notifying you of a rate change and giving you the option to accept or reject. If you reject, the card issuer usually lets you pay off the balance at the old rate but won’t allow you to charge anything else on it.

Often, borrowers get so angry when they have to choose between accepting the new rate or losing their charging privileges that they close down the account.

Don’t, said Adam Levin, former New Jersey Consumer Affairs Director and founder of Credit.com. Your credit score, which you have to keep healthy because it determines whether you can get any sort of loan like a mortgage, takes a hit if something called your credit utilization ratio is high. This is the proportion of the credit that is available to you that you actually use. If you’ve used too much, your score will suffer. “You always want to keep your eye on the available credit ball,” Levin said.

Other consumers start shopping around for balance transfer offers on other cards. That's dangerous, Levin said. When you apply for too many cards at the same time, you start looking like a risky borrower. “Don’t fall for every offer,” he said.

It’s important during times like these to pay attention to your credit score. Many card companies are scrutinizing all of their customers. If your credit score drops between now and when these new regulations go into effect, you might end up getting your limit cut or interest rate increased. The cost to you would be no small change.

Here are some tips to improving your credit score that I gathered from consumer advocates and from MyFico.com, which you should really check out. I also discussed this topic last week in an NPR interview that you can listen to at http://tr.im/lu9g.

Always pay your bills on time. If you’ve missed payments, however, catch up as soon as you can and stay current. The longer you pay your bills on time, the better your credit score.

Keep your balances low. The closer to being maxed out you are, the lower your score.

Don’t close unused credit cards. Many people do that thinking it will raise their score. It actually could lower it because the proportion of credit lines used affects your score.

Don’t open new cards too rapidly. You might be tempted to do that to increase your available credit. But such a move could make you look like a risky borrower.

Ask for help if you need it. If you are having trouble paying your credit cards, call your creditors and ask for a lower rate or other type of workout plan. Or go to a reputable credit counselor.

Adam Levin and I will chat more about the new credit card regulations today at 1 p.m. If you have questions, go to http://www.washingtonpost.com/wp-dyn/content/discussion/2009/05/15/DI2009051501289.html

By Nancy Trejos  |  May 18, 2009; 7:00 AM ET
Categories:  Nancy Trejos  
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Comments

That's all well and good, but what individuals can do about it only goes so far.

I have stellar credit, that hasn't changed, but the CC companies that I happen to have relationships with are all under major duress. 2 have closed un-used cards, the remaining 2 have both reduced the credit limit AND increased the interest rate by 4-6%. Why? Because they are desperate for money, they don't have the liquidity to be on the line for that much credit (that I'm not using anyway), and because they know that once these rules go into effect they may never have the opportunity to raise my interest rate again. So, they're doing it now.

Does this effect me, who after all these limit cuts is still under 20% utilization? And who never leaves a monthly balance unpaid? Not really, but it could.

Gone now are the days when CC limits acted as effective emergency savings accounts. You need to have your own cash on hand for any bad times now. No more paying for it after the fact.

Posted by: kingstowne_renter | May 18, 2009 9:22 AM | Report abuse

I had a card that wanted to raise interest rates, even though I paid off eve4y month and had an effective zero rate. But I hardly ever used it and I closed it. My ratios will still be low. And I did get two new cards last year for good deals. But I pay everything off every month. I am comfortable with my methods. Even if they do not agree with this advice.

The problem is that I do not know my credit score and am reluctant to pay for that information. I also consider it unethical to subscribe for a score and plan to end the subscription before they charge a fee. It just does not seem right to do that. And I fear they could catch me in a trap of some sort or the other - like a account I have to close in person in Fargo, ND only on February 29th. So, you can see this is making me crazy. I am seriously considering going to a debit card for all my purchases.

Posted by: GaryEMasters | May 18, 2009 2:30 PM | Report abuse

While many consumer advocates are excited about the new credit card legislation, how much will it really help? It seems as if it's for those that carry a balance from month to month. And while some practices will be prohibited, won't the result simply be higher interest rates?

Posted by: DoughRoller | May 19, 2009 6:16 AM | Report abuse

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