How to Master the New Credit Card Rules

Here’s how to respond when your credit issuer treats you badly.

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Today’s guest post comes from Adam Jusko, Founder of IndexCreditCards.com, which compares credit card offers in categories such as low-interest credit cards and cash-back credit cards.

My wife was having a bad day.

"Everyone is so stupid!" she told me.

The target of her wrath was her credit card company, which had just attached an annual fee to her credit card. When she called the company to say she'd never agreed to this change, the bank said they'd sent a letter informing her of it.

I told her she wasn’t the only one this has been happening to recently, and the bank probably had sent her a letter, but it likely got lost among all of her other mail.

"They're always sending things! I don't have time to read all that stuff! They're just so stupid. I've spent a lot of money with that card, and now I just canceled it. What good does that do them?"

[See 5 Reasons Credit Card Companies Won't Survive.]

It's a great question. From the outside looking in, it appears that credit card issuers are actively trying to drive out their best customers. What are they thinking?

Well, to understand the behaviors of the issuers, you first have to understand the blows the industry has taken. The lousy economy caused record credit card defaults, which means a huge number of people simply gave up on paying their credit cards and card issuers were forced to write them off as permanent losses. While busy panicking over this phenomenon, issuers saw Congress and the President create a new set of laws that restricted just about all of the issuers' favorite "gotchas"--no more raising rates on old balances, no more allowing customers to go over their credit limits and then charging them a fee for doing so, etc. In just the past two years, life as the credit card companies know it has changed drastically--maybe forever.

From the outside it appears issuers have responded like the proverbial chicken with its head cut off--running around in circles with no apparent rhyme or reason. To some extent, they have. But they've been doing so in an attempt to answer two central questions:

1. How do we stop the bleeding? (In other words, how do we reduce the number of defaults?)

2. How do we replace the profits lost due to the new regulations?

[See The Best Credit Card for College Students.]

In most cases, the answer to the first question was to pull back--stop giving credit, take credit away, or at the very least slash the credit limits of those who got to keep their cards. While this reaction was akin to punishing me for my neighbor's ill-advised shopping sprees, the issuers didn't care. Better to cut off credit altogether than to risk losing more money.

The answer to the second question has not been fully answered. So far the strategies have been uncreative and reflective of short-term thinking: raise interest rates, bring back annual fees, monkey with rewards programs.

My wife was the victim of both questions asked above. She had an open credit card, meaning she had the potential to suddenly run up a huge tab and then skip town. At the same time, she rarely used the card, thus generating no profit from month to month. The only way for her to be potentially profitable was to slap an annual fee on her card. If she pays it, great. If she cancels, the issuer no longer has to worry about the risk associated with that open credit line.

So, what does this all mean to you? What can you do to escape the slash-and-burn techniques so many credit card issuers are using right now? A few suggestions:

1. Have more than one credit card. Most people find the idea of multiple credit cards counterintuitive to good financial sense, but in the current economic climate, relying on a single card and the mercy of your issuer is not wise. Loyalty is not being rewarded. Apply for a second credit card from an alternate issuer before you need it, so you are not scrambling if your first card is closed, slapped with an annual fee, or otherwise disrespected. You might even consider a third card, but stay with a number that is comfortable for you and matches your ability to handle credit.

2. Divvy up your purchases among multiple cards. My wife had an annual fee added to her card because she didn't use it often enough. If she had divided her purchases so the card had more activity, this may not have happened. I know it's tempting to put all of your purchases on that card with the great rewards, but, again, your loyalty may not be rewarded with loyalty from your card company.

3. Try not to carry a balance. Easier said than done for many people, I know. But carrying a credit card balance shifts the power from you to the issuer: the more you owe, the more you are over a barrel when your issuer decides to increase your interest rate or add an annual fee. It is more difficult to get new credit now, so you may have trouble shifting your balance to a better card if need be. In addition, moving money from one card to another is expensive--the days of fee-free balance transfers are over; you generally will pay a fee of at least 3 percent of your balance if you move debt from one card to another.

[See When Credit Cards Come to the Rescue.]

Recent changes in the credit card industry are enough to make your head spin. Even those of us who follow the industry closely have trouble keeping it all straight. The bottom line? Be flexible. Don't get tied to one company, have a good fallback, and don't get in over your head.