Debtor and Creditor

Changing Credit Card Terms

As more banks fail or seek federal money to stay afloat, consumers are being squeezed by rising interest rates and increased fees on their credit cards. Banks and other credit card issuers are looking for ways to maximize their revenue and reduce their risk as they deal with tremendous losses stemming from the mortgage crisis and worsening economy.

Credit card companies are targeting all credit card holders with this unprecedented change in credit card terms. Not only consumers with risky credit scores and missed payments, but also those who always pay at least their minimum payment on time, are finding the interest rates on their credit cards soaring.

Also, you may have gotten a card that originally had a zero percent interest rate for a period of time and when the time was up, the rates are outrageous.

Pending Federal Reserve Rules Protect Credit Card Users

The Federal Reserve recently approved rules aimed at helping consumers handle their credit card debt better. However, the rules don't take effect until July 1, 2010. The new rules prohibit increases in the rate charged on pre-existing credit card balances.

The new rules also do away with "universal default." This is a practice where credit card companies raise the rates on your current credit card if you make a late payment on a different company's credit card. The amount of advance notice before a changed term is imposed increases from 15 to 45 days. This gives you more time to find other financing or change the way you use the account.

These new rules protect credit card users at a time when rising credit card rates are causing many Americans serious financial hardship. Additional information is available on the Federal Reserve Web site.

No Limit on Interest Rate Increases

Credit card companies are established or have headquarters in states that don't cap the amount of interest they can charge. This means that there's no limit to how high those companies can raise the interest rates on accounts. Many financial companies that offer credit cards are "Delaware Corporations" because Delaware has very favorable tax and interest rate laws for companies.

As a result, many consumers are finding it nearly impossible to pay down their credit card balances. Even if you continue to pay just the minimum amount due each month, the balance will likely increase instead of decrease, not to mention minimum payments increasing as well.

Opting Out

Until the new rules take effect, what can you do if you're confronted with this difficult situation? In most cases, you will be able to "opt out" of the interest rate increase. You typically must notify the credit card company by a specified date, and close your account to future purchases. Check your credit card agreement or contact the company to make sure they will allow you to decline the interest rate increase.

Find out the exact procedure you need to follow in order to opt out. You should follow up with a certified letter, so you have proof in case of a dispute even if the company allows you to notify them by telephone.

Opting out is advantageous to you since the credit card company won't expect you to pay off the balance in full, although it would be your best course of action. If you can't pay off the debt, the current balance remains at the old interest rate until it is paid in full or transferred to another account.

A Reduced Credit Limit Lowers Your Credit Score

In addition, many credit card companies are closing unused credit card accounts and drastically reducing credit limits on active accounts. This reduces their risk that a consumer in financial trouble will run up the balance on the card and fail to pay it off.

Unfortunately, these changes can significantly lower your credit score even though you're making payments on time and not exceeding your credit limit. This is due to the change in your credit utilization ratio. This is an important factor in determining credit scores.

Your credit utilization ratio is the amount of credit you have used compared to the amount of credit you still have available. For example, if your credit limit is $3,000 and your balance is $750, your debt is only 25% of your total available credit. However, if the company drops your credit limit to $1000, your debt is now 75% of the amount of your credit limit. You are considered a greater risk even though you haven't done anything different.

Protect Yourself Early

More than ever, consumers rely on credit and debit cards to make smaller and larger purchases of everyday items, from a cup of coffee to a large-screen television. Credit card companies are willing to take advantage of that. Read your notices from the credit companies and ask questions if you're not exactly sure what they say. Credit card companies are hoping that you won't. Don't wait until you're in a personal financial meltdown to protect yourself.

Questions for Your Attorney

  • My credit card issuer has changed the terms of my account, and I think it has run afoul of consumer protection laws. What can I do?
  • Do I have any recourse if a credit card company changes my credit limit, and that in turn impacts a credit score and availability of credit? I was shopping for a mortgage loan and it seems my credit score changed in a short period of time due to an increased credit utilization ratio.
  • Do creditors have to advise of the possible effects on your credit score when they change account terms?
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