Time to Read the Small Print Coming from Your Credit Card Company

Starting August 20th one of the main provisions in the bill President Obama signed in May goes into effect. While most provisions in the Credit Card Accountability, Responsibility and Disclosure Act don’t take effect until next year, the advance notice requirement is part of the first phase of regulations put forth in the bill. Previously, credit card issuers could raise rates with just 15 days’ notice but, with the activation of the advance notice requirement, card holders must be given a warning at least 45 days before interest rates can be hiked. There are some exceptions to the provisions, which is why you’ll want to keep an eye on the mail coming from your credit card company. One exemption applies to variable rate cards pegged to a benchmark like the prime rate or the London interbank offered rate (LIBOR); if you have one your issuer doesn’t need to give you advance notice if the pegged benchmark changes. For that reason, banks are switching fixed rate accounts to variables. The variable rate charged to card holder is calculated by adding a margin to the benchmark. For instance, with the prime rate currently at 3.25%, a margin of 6.7% would result in a rate of 9.95%. Should the prime rate increase to 4.25%, the interest rate charged to card holders would rise to 10.95%, which is another reason behind the issuers changing from fixed to variable rate cards; with interest rates at historic lows, issuers don’t want to lock in rates at low levels when there is essentially nowhere for them to go but up. The Credit CARD Act’s provisions do require a 45 day notice if the margin charged above the benchmark is increased by the issuer. Many issuers are making changes (increases) in rates and fees prior to August 20th to avoid restrictions that will be in effect as of that date. Card holders have five options once they receive a notice from their issuer regarding interest rate hikes, or other fee increases: 1) Pay off the balance – If you have several credit cards, make sure your highest balances are on the cards with the lowest interest rates. If a full payoff of your cards with the highest rates is possible, pay them down. Be sure to leave enough cash on hand to live on should you experience a job loss or illness. Don’t assume that your available credit will be there if you need it later. Issuers have been cutting credit limits across the board to reduce risk. 2) Continue to make payments at the new rate – If rates are being hiked on an account with a low balance, the increase in your monthly payment may be tolerable. If so, you can maintain your payments and keep the account open, which can be beneficial toward your credit score. 3) Transfer to a lower cost issuer – If your credit scores are solid, see where you can get the best deal with another issuer. Be sure to get familiarized with all the terms with the new credit card. 4) Opt out – After August 20th the 45 day notification will be in effect but there is no cap on the amount that rates can be increased. That window will allow credit card issuers to make huge interest rate hikes on their accounts. If a large rate increase is going against a larger balance and transferring isn’t an option, issuers are required to allow card holders to continue making payments at their current rate until the card is paid in full. No further purchases are allowed and the account will be closed as soon as it is paid off. 5) Debt settlement – Many card holders are struggling to make payments under current conditions. Seen as the highest risk component of issuers’ portfolios, many of the rate and fee hikes are being pointed at those that are in the most vulnerable position. Chase, for instance, is raising the minimum payments on their higher risk accounts from 2% to 5%. That increase alone is going to cause major problems for a large of their card holders. Should the minimum payment requirement be paired with interest rate hikes, the problems will be even greater. At that point debt settlement becomes a viable option, not only for credit cards but for other unsecured debts as well. Medical bills, department store debt, and signature loans are among the many other types of accounts which can be rolled in to a debt settlement. The immediate relief provided comes in the form of a reduction of approximately 50% on the monthly payments for accounts that have been rolled in to the settlement. The longer term benefit is that the accounts are typically settled at a discount of 40% to 60% of the original balance, allowing for a full payoff of all accounts over a time frame ranging from 18 to 48 months. For card holders struggling with debt, the last two options are likely to be the best choices but each must be considered on its own merits. For instance, opting out with the ultimate closure of the account can hurt your credit score due to something known as a “credit utilization ratio”. That ratio is calculated based on the amount of credit you are currently using as a percentage of your total of your available credit. A low credit utilization ratio is desirable while a high number can designate you as a risky borrower and hurt your credit score. By closing an account and losing the available credit attached to it, your ratio could increase. Due to the many variables that can face struggling individuals, making the best choice depends on the circumstances of each situation. If a major purchase relating to a credit line or mortgage is in the near future, taking action that may lower your credit score before the transaction could result in higher interest payments or non-approval. For homeowners that are applying for a loan modification, reducing the monthly debt load using a debt settlement could yield positive results due to the fact that credit scores are not an important factor in the decision making process for approval. Many homeowners, in fact, are employing law firms familiar with both processes to synchronize their debt settlements with their home loan modifications. If you are already carrying a low credit score, the opt out process won’t do significant damage to your credit score. The same can be said for entering into a debt settlement. For many borrowers, taking defensive measures to keep food on the table is a much higher priority than worrying about the addition or subtraction of points on a credit score. In either case, by staying to plan and paying off the associated balances, you be able to rebuild your credit score at some point in the future under less stressful circumstances.

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