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Know your options before cutting up credit cards

While consumer groups generally applaud new restrictions on credit cards, Vickie Wellington isn't buying into them. In fact, "I'm opting out" of credit cards altogether, says the Detroiter, 60. • "I just don't want to be bound by those new terms. There are higher fees. There are new fees," Wellington said. "I don't need credit that bad." • Since the summer, credit card companies have been changing their terms to work around new rules that will take effect Feb. 22. In August, a rule took effect requiring them to send a notice 45 days before increasing rates or making significant changes on certain fees, such as annual fees or late fees. • Wellington read those notices and canceled cards. How many more people will read all the fine print — or react by cutting up their plastic?

"Ultimately, the power rests with the consumer," said Ken Clayton, senior vice president and general counsel for the American Bankers Association.

Consumer groups charge for the most part that credit card companies got away too long with sneaky rate hikes, oddball billing practices and outrageous fees.

But the new restrictions have a price. Credit card companies are now creating new fees, such as inactivity fees, or bringing back annual fees.

"These are folks that never met a fee they didn't like, anyway," warned Adam Levin, co-founder and chairman of Credit.com. "If they can't get it in a rate, they're going to go after a fee."

Still, new rules can help:

• In most cases, there will be no interest rate increases for the first year that any account is open.

• Your payment will be due on the same date each month, and if the date is a Sunday, could be received by Monday and still be considered on time.

• Issuers cannot, in most cases, raise the rate on existing balances.

One rule change could be a huge benefit to consumers who desperately want to pay down their credit card debt. Starting in March, any extra money paid beyond the required minimum must be applied to the part of your credit card debt that carries the highest interest rate.

"People will pay off their balances sooner — and they will pay less," said Nessa Feddis, senior federal counsel to the Government Relations Division of the American Bankers Association, and vice president, card policy.

Still, read the fine print and see how the rules will apply.

And don't be fooled: New rules don't completely eliminate higher rates or fees.

For example, your credit card company can raise the rates on existing balances if the payment is more than 60 days late or payments fall behind in the debt-management plan.

If you have a variable-rate credit card — and many cards are moving from fixed rates to variable rates — you're going to see the rate go up if the index that's tied to that card goes up.

Now that interest rates are at historic lows, variable card rates are likely to go up.

And a rate hike on a variable-rate card could apply to both old charges and new charges.

You still could face some pretty hefty fees, too.

The new rules ban fees for charging over your limit — unless the consumer has given the credit card issuer permission to allow the transactions, which could then carry a fee.

Without such permission, a purchase that could take you over your available credit limit could be denied.

"If you do not opt-in to over-the-limit transactions and your credit card company allows one to go through," the Federal Reserve noted in its summary of the new rules, "it cannot charge you an over-the-limit fee."

Five ways

to deal with

credit card tricks

1 Be careful before you cancel any cards in a huff. If you have a balance, find out how soon you have to pay it off in full if you cancel the card.

It would not be

immediately, but

your minimum

payment could go up.

And the card issuer

could put you on a

five-year repayment plan — but only if that can be done without more than doubling the current minimum payment, said Gerri Detweiler, a personal-finance expert with Credit.com, a consumer education Web site.

2 Make sure you

have another card before canceling

an old card. In some

cases, it could be harder to get a new credit card because of tight credit

conditions.

3 Avoid canceling

all your cards — or making drastic moves — just before you want to refinance a mortgage or apply for a

car loan. It's likely better

to stop charging on the card than to close the account. But if you don't use a card, make sure the card isn't charging you an "inactivity fee."

4 Pay attention to any balance transfer fees. Some have been raised to 4 percent or 5 percent of the balance transferred.

5 Read every notice — even if you don't think you have time. You may discover new fees or higher interest rates. See www.federalreserve.gov for "What You Need to Know: New Credit Card Rules."

Know your options before cutting up credit cards 02/06/10 [Last modified: Friday, February 5, 2010 10:14pm]

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