How Banks Are Striking Back!

Faced with sweeping new restrictions on credit-card companies which would ban extra

fees and fluctuating rates and arm tens of millions of consumers with more information on their debts, banks are aggressively taking steps now to position themselves to replace any lost profits resulting from these changes. Starting in February 2010, new federal legislation will ban practices such as charging consumers to pay by phone and sudden surges in interest rates. Payments above the minimum due would be applied to balances with the highest interest rates. Information once relegated to tiny print must be made clearer, and consumers will soon be told how long it would take to pay off a balance if they pay only the minimum due.

Consumers also wouldn't face a retroactive interest-rate increase on existing balances unless payments are 60 days overdue. Even after that rate increase, a consumer could get the old rate reinstated by paying on time for six months. The legislation bans a practice known as double-cycle billing, in which a late-paying consumer is assessed interest on a prior month's balance that had been paid in full, in addition to the late balance. Issuers also will have to send bills 21 days before the due date and provide at least 45 days' notice before changing any significant terms on a card.

The new rules still allow card companies to raise interest rates on consumers' future charges. And they will do little to stop banks from cutting credit lines for consumers deemed risky. Issuers are already increasing rates for swaths of consumers ahead of the new rules as they try to protect against losses. Tens of thousands of borrowers with good credit are seeing their interest rates hiked to as much as 29%...others are just getting notices from their banks that their line has been cut severely or eliminated completely.

First reaction from some consumers is to close their accounts and not accept the higher interest rates proposed but pay off existing balances at old rates. Intuitively, this may seem reasonable but one needs to remember that closing a credit card account can cause a drop in an individual's credit score because of either changed utilization rates or elimination of positive credit history.

Consumers also need to be aware that if they accept the new, higher interest rates by using the card again, that even if the account is paid down to zero, banks are now starting to charge up to $19 per month for inactive use of the card. The better strategy to avoid this charge is to make a small food or gasoline purchase each month on each card so as to avoid these new inactive use charges or worse cancellation of the card.

by: Robert Lefcort

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