Saturday, June 13, 2009

Hit with an APR hike? Keep the card or cancel?

By Todd Ossenfort

The Credit Guy
'The Credit Guy,' columnist Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.

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Question for the expert

Dear Credit Guy,
I have a credit card that I've had for many years with a $30,000 limit at a fixed 7.9 percent interest. Currently, I have no balance on this account. I have impeccable credit. Today I received notification that the interest rate on this card will go to a variable rate in July with an interest rate of 17.9 percent. Is this legal? -- Marlene

Answer for the expert

Dear Marlene,
As of this week, yes, it is legal to raise interest rates on a credit card account for no reason. Many, if not most, credit card agreements currently have a clause known as "universal default." This clause allows the card issuer to raise the interest rate on the account if you are late with a payment to any creditor -- even if you have never been late with your credit card payment and otherwise met your end of the deal with the issuer.

The good news for consumers is that soon universal default and other unfriendly credit card issuer practices will end. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 was signed into law by President Obama on May 22, 2009. The bad news is that the bulk of the law's provisions will not take effect until the end of February 2010.

So from now until early 2010, consumers will need to keep a close watch on their credit card accounts. Review carefully any correspondence from your credit card issuer(s) and be prepared to make decisions on how or if to act.

I would recommend that you consider the following:

  • Most card issuers will give you the option to opt out of any changes to your cardholder agreement. If you choose to opt out, the account is closed by the issuer and you can then repay any balance under the current terms. Keep in mind that if the account is one of your oldest credit accounts, closing it could negatively affect your credit score. If you are not carrying a balance on the card and the account is a longstanding one, you might consider leaving it open under the new terms and using it occasionally for minor purchases, so you retain access to the credit line.
  • Keep a close eye on your credit limits. Creditors are not required to notify you of a change in your credit limit, although many do. If you carry a balance on an account where the credit limit is lowered, it could also lower your credit score due to an increase in your credit-used-to-credit-available ratio, also known as the credit utilization ratio. For accounts that you are currently using to make purchases, double check each statement for any changes to ensure you don't go over the limit and incur costly fees.
  • Be prepared for changes in annual fees. For those cards without an annual fee, you may receive notice that a fee will now be assessed. For those with an annual fee, you may receive notice that the fee has increased.
Also, keep close track of any rewards and points programs. You might consider cashing in now, because the programs may change or be discontinued after the new law takes effect.

Take care of your credit!