Financial meltdown: credit cards

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Biggest mistakes

During this financial crisis, some people who thought themselves immune to negative changes to their credit cards often thought wrong.

“Those of us that have never been delinquent … even once, in fact, find our credit lines cut back, annual fees being implemented or raised, rewards programs being cut back or costs associated with them,” says Robert Hammer, chairman and CEO of credit card advisory firm R.K. Hammer Investment Bankers in Thousand Oaks, Calif.

Some issuers, reeling from high loss rates and a restrictive new law, have tried out a host of tactics to minimize risk in their portfolios and offset projected profit losses that they anticipate under the CARD Act. These factors have resulted in unwelcome adjustments to some accounts, including lower credit limits, closure for inactivity, added fees and increased interest rates. Not all of these changes had something to do with bad borrower behavior.

For example, some 33 million U.S. credit cardholders saw a decrease in their revolving credit between October 2008 and April 2009, according to a recent study from FICO, the credit score developer. Most people in this group — about 24 million consumers — had no reported late payments or other risk triggers to warrant a reduction to their credit limit.

“It isn’t a pretty time for credit card users because things are just happening and we’ve got a whole other almost six months to wait until more bad things can happen,” says Linda Sherry, spokeswoman for Consumer Action, a San Francisco-based consumer advocacy group.

Until the majority of the provisions in the Credit Card Accountability, Responsibility and Disclosure Act take effect in February, anyone paying the minimum on a large balance is most vulnerable to severe credit limit reductions, raised rates and higher minimum payments.

Smart strategies going forward

The terms of an account can change even if you do nothing wrong. Paying down balances quickly will not only save you money, but ensure that most negative adjustments pose little impact if you need to keep the account open. Use Bankrate’s pay-down calculator to estimate how long it will take you to zero out your balances.

Read your mail. The Credit CARD Act requires issuers to provide 45 days’ advance notice before an increase to the rate, fees or finance charge takes effect. The earlier you know about an important change to your account, the more time you have to deal with it.

Know the loopholes in the advance notice requirement for rate hikes. Issuers don’t have to send such announcements when the increase is due to a 60-day delinquency, index-related movement tied to a variable rate, expiration of a promotional rate or the conclusion of a hardship agreement.

They also don’t have to disclose credit limit reductions in advance. Make sure to check the credit limit on your monthly statements and before making a large purchase. Breaching the limit can punish your credit score and trigger an overlimit fee. A provision in the Credit CARD Act prevents issuers from imposing an overlimit fee on transactions that exceed the credit line unless the cardholder has given the company permission to allow such charges. If users don’t make this election, they won’t incur an overlimit fee, but overlimit transactions may get denied. This protection doesn’t take hold until February.

With any required advance notice of a change in terms, issuers must include an opt-out disclosure. Opting out closes the account, but can’t constitute a default of the account or require immediate repayment of the balance. In fact, issuers must provide a repayment method “no less beneficial” than either a payment plan that spans at least five years, or a new minimum payment percentage that is no more than twice the previous percentage.

Opt out if you can afford a possible credit score hit from the account closure, but not the new fee or interest rate. Learn how account closures can ding your credit score.

Compare new cards using Bankrate’s credit card search engine.

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