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July 5, 2010 Financial Column

Financial News Column

            In 2009 Congress passed a new law for credit cards that helps protect consumers from most instances of sudden interest rate increases and other unfavorable changes in fees and account terms. Most of the rules implementing the law are now in effect, and the remaining provisions will be effective on August 22, 2010. There still are several pitfalls to avoid in the world of credit cards.  The Federal Deposit Insurance Corporation offers the following tips:

  1. Understand your right to cancel a credit card before certain significant account changes take effect. Under the new law, card issuers now must generally tell customers about certain changes in account terms — in areas such as interest rate and fee increases — 45 days in advance, up from 15 days in the past. In that same notice, they must inform consumers of their right to cancel the card before certain account changes take effect. These notices may come with your credit card bill or through a separate communication.
    Consumers who notify their card company to cancel their card before fees are increased or certain other significant changes take effect will still be required to repay the outstanding balance, but they cannot be required to repay it immediately. However, the card company can increase the minimum monthly payment, subject to certain limitations.
  2. Keep an eye on your credit limit. Some people, even those with good credit histories, have recently seen their credit limits cut back. Reductions in credit lines can be harmful because your borrowing power will be diminished. Also remember that your credit score is based, in part, on what percentage of your credit limit you are using and how much you owe. Borrowers who carry large balances in proportion to their credit limit may see their credit scores fall. And a lower credit score can make it difficult or more expensive to get new credit in the future.

  3. Decide how you want to handle transactions that would put you over your credit limit. Under the new law, no fees may be imposed for making a purchase or other transaction that would put your account over the credit limit unless you explicitly agree, in advance, that the credit card company can process these transactions for you and charge a fee.

  4. Be cautious with “no-interest” offers. Many retailers, such as electronics or furniture stores, promote credit cards with “zero-percent interest” on purchases for a certain amount of time. These cards allow you to buy big-ticket items, perhaps a sofa or a stereo system, without paying interest for anywhere from six months to more than a year. While the chance to avoid interest payments sounds like a terrific deal, keep in mind that if you don’t follow the rules for these offers, this “no-interest” special could end up being expensive.  The reason is, with many of these offers, you must pay off the entire purchase by the time the promotional period ends to take advantage of the zero-rate offer. If you don’t, the lender will charge you interest from the date you bought the item.
  5. Keep only the credit cards you really need and then periodically use them all. For the average person, two or three general-purpose cards are probably enough. Consider cancelling and cutting up the rest. However, also remember that closing a credit card account can temporarily lower your credit score, especially if the cancelled card was one you owned and used responsibly for many years. And in the new environment, it also may be beneficial to periodically use all of your cards. Here’s why. Even if you pay your card bill in full each month and never pay interest, using your card earns money for the card company because merchants pay a fee each time you use the card. So, consumers who regularly use their cards and repay their debt may be considered valued customers, even if they pay on time and don’t pay interest.
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