How will the Credit CARD Act affect your accounts?
Do you have credit card debt? If so, the good news is that the card issuer is no longer able to hike your interest rate without warning, or raise rates on an existing balance. They are required to send your bill at least 21 days before it’s due (up from 14 days). Every bill needs to show how long it will take to pay off the balance if you make the minimum payment, and how much finance charges you will pay.
These reforms are due to a new law, called the Credit CARD Act, which came into effect last month. Excellent!
Why do the credit card issuers conduct business in this manner? It isn’t because they like watching you suffer. They do it to make money. Remove these revenue streams, and the card companies need to find new ways to be profitable.
A crackdown on card holders who pay in full every month
A customer who always pays on time and never pays any interest produces little revenue to a credit card company.
Interest generates the majority of credit card profits. The card issuers have always done their best to turn these customers into debtors. Have a customer who always pays on time? Make sure their bill arrives a few days before it’s due, then, when they pay late, slap a 30 percent penalty APR on their entire balance.
The CARD Act makes it harder to pull this trick off: they have to send you the bill earlier, and you have to be 60 days late before they can raise your interest rate. But you can still blow it the old-fashioned way: occasionally pay less than the balance due.
Here, have some rewards
Reward cards aren’t going away. In order to explain why credit card issuers love reward cards, it is because the banks make money on interchange fees.
When you use your card for a $100 purchase at Target, the store doesn’t receive the full amount. A small percentage goes to Visa (or MasterCard or Amex). A much larger portion, 1 to 3 percent, goes to the bank which issued the credit card. This is called the interchange fee.
The interchange fee isn’t the same on all transactions. It depends on a lot of factors, one of which is whether you’re using a reward card: reward cards carry higher interchange fees.
So, thanks to the CARD Act, you’ll be receiving more credit card applications in the mail for reward cards, especially if you have a high FICO score. They’re a great deal for the banks: higher interchange fees; reward cardholders charge more than the average person, to maximize the reward; and a significant percent of the rewards go unredeemed. Credit card companies make money on unredeemed rewards.
Fees, fees, fees
Here are a few favorite fees, which may return due to the CARD act:
- Annual fees. The classic, and more popular than ever–especially for cardholders with low FICO scores.
- Inactivity fees. Some banks charge you an annual fee for not using your card or not using it enough.
- International exchange fees. As the New York Times reports, card companies charge up to 3 percent every time you make an international purchase–even if the purchase is in US dollars.
Read the fine print in regards to the terms and conditions on your credit card account. Only utilize the credit cards from companies which value your business.
Don’t close unused credit card accounts, as this action can hurt your credit score. Instead, let these accounts remain inactive with zero balance. After several months with no activity, the credit card issuer offer you better interest rates and promotions to use the inactive credit card.
If you use a rewards credit card, use only one rewards credit card. This will maximize your reward earning potential, and not spread rewards across incompatible networks.
These tips have been brought to you by ZeroPercentCards.com!