Credit Cards: Riding Out the Storm Safely

By Gerri Detweiler
The Union Credit Doctor

Credit card debt is in the midst of “the perfect storm.” Debt levels are high, banks are struggling with losses in mortgages and other bad debt, and unemployment is rising. That means it’s getting harder for consumers – and even some lenders – to stay afloat.

A bright spot on the horizon are the new rules federal regulators have unveiled to help protect cardholders. But that help will be some time in coming, as they don’t go into effect until July 2010. Congress is also discussing other changes to protect consumers.

That means this storm will likely get worse before it gets better. Card issuers may rush to lock in higher interest rates and/or fees while they can and many are closing accounts or limiting credit lines. Here’s what’s happening, and how to protect yourself:

Rising Interest Rates

The difficult economic environment means your credit card interest rate may go up, even if you pay on time. Generally, there are no caps on the rates card companies can charge, and some cardholders have seen their interest rates suddenly double. These higher rates are applied to any outstanding balance, as well as new purchases. Unlike in the past, where it was fairly easy to call your card issuer and negotiate a lower rate, many people today are reporting their issuers won’t budge.

What You Can Do: Read the letters your credit card issuers send you as soon as they arrive. Look for a Notice of Change in Terms, and if you find one, review it carefully. You may have the option to reject any new rate or fees, and pay off your balance under your current terms. But you typically have to opt out in writing quickly, and you must stop using the card. If you do reject the new terms, make sure there are no recurring charges (subscriptions, for example) that will be automatically billed to your card. Even if you opted out, any new charges may trigger “acceptance” of the new terms.

Can’t afford the new, higher interest rate? A credit counselor may be able to negotiate a lower rate under a Debt Management Plan (DMP). Union members can get help through the Union Plus Credit Counseling service, including a free budget analysis session, and exclusive discounts if you enroll in a DMP. Counselors are available 24/7. Call 1-877-833-1745 or visit UnionPlus.org/CreditCounseling.

What’s Coming: When new regulations go into effect in July 2010, issuers won’t be able to raise your interest rate at any time, for any reason. If they do raise your rate, you will be notified at least 45 days in advance, and the new rate will be applied only to new activity, not to your outstanding balance. (or you pay more than 30 days late).
 
Tip: While most other credit cards raise rates if a payment is a day late, Union Plus Credit Card holders won’t trigger a higher default rate if they are late or go over the limit just one time. Still, it’s important for Union Plus cardholders to pay on time since paying late 3 days or more twice or going over the limit twice in 12 months can result in a higher rate. If that does happen, you can earn back your original rate with six months of on-time payments.

Lower Credit Limits

Some issuers are lowering credit limits or closing accounts, even for customers with strong credit scores. If you make a purchase that puts you over your limit, you may be charged an over-limit fee, and your interest rate may increase.

What You Can Do: Monitor your credit limit closely. If available, set up online alerts to tell you when your balance gets close to the limit. Watch out for notifications from your issuer and make sure to read them carefully. And, please note that some issuers notify their customers of line decreases through messages on billing statements.

It’s also a good idea to have a back-up credit card in case the one you use most often is cancelled. If you have a card you haven’t used recently, you may want to dust it off and charge an everyday purchase on it from time to time to keep it active as issuers are closing unused accounts. Feel free to pay it off in full to avoid interest charges.

Tip: Consider getting a Union Plus Credit Card, if you don’t already have one. It already offers consumer-friendly terms not available on other major credit cards.

Due Date Dilemmas

If you miss your due date, you can be charged a late fee, and your interest rate (and minimum payment) can jump dramatically. But even with the best of intentions, it can be easy to miss a payment. That’s because some card companies have been shortening grace periods, while others use “floating due dates” that change from time to time, or even fall on holidays or weekends – when payments aren’t accepted! And, it’s not just the due date you need to pay attention to – you need to know what time on that date the payment is due. Some issuers require payment early in the day for it to be considered on time.

What You Can Do: Check your due date as soon as the bill arrives, and if possible, make your payment right away or schedule the payment online. Make sure your payment arrives by the day before it’s due to allow for early cut-off times. If a due date falls on a weekend or holiday, be sure to give yourself extra time to pay.

Tip: Union Plus Credit Card holders enjoy a longer than average grace period of 25 days.  

What’s Coming: The new regulations in 2010 will require all issuers to mail statements at least 21 days before the payment is due, or forego charging a late fee. Issuers will not be able to set a cut-off time earlier than 5 p.m. for receiving a payment. If a due date falls on a day when payments are not processed, a payment that is received the next business day will be considered on time.

Higher Minimum Payments

If you’re struggling to make your minimum payments, it can come as a shock to discover your required payment has doubled. But that’s happening to many people, and some are finding they just can’t swing the larger amount.

What You Can Do: Don’t wait until your payment goes up to get help. Contact the Union Plus Credit Counseling service for a free budget analysis session. As part of the Union SAFE benefits program, if you decide to pay back your debts through the Union Plus Credit Counseling program, your enrollment fee will be waived, and your monthly DMP fees will be refunded after a year of payments on the program. Counselors are available 24/7 by calling 1-877-833-1745, or visit UnionPlus.org/CreditCounseling.

Fees Make a Comeback

A major credit card company has added a $10 monthly maintenance fee to some accounts. Penalty fees for late payments and over-limit charges continue to be high. And many issuers are doing away with caps on balance transfer fees, which means you could be charged a fee of as much as 4% if you transfer a balance to pay down another card.

How to Protect Yourself: Check your statement for new fees. If you find one, contact your issuer to ask whether it can be waived. If not, consider transferring your balance to another card. But before you do, confirm how much the balance transfer fee will be and make sure it’s worth it.

What’s Coming: Under the new regulations, monthly maintenance fees will be prohibited.