New credit card rules take effect this week. While the rules are good news for consumers, they also are forcing cash-strapped banks and credit card companies to look for other sources of revenue. So, if you have and use credit cards, you need to be particularly vigilant over the next few months to make sure you don't unwittingly expose yourself to unnecessary fees, avoidable transaction charges, and higher interest rates.
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The new rules, as explained by the Federal Reserve Board, require credit card companies to provide you with 45-day notice of any major changes to your card's interest rates, fees, and other material terms. Also, overdraft protection is no longer automatic. Your approval is required for such protection, which carries a stiff service fee. If you don't provide that approval, use of your card for purchases that exceed your card limits may be denied. But at least you won't be charged a fee.
The new rules also make it harder for companies to raise the interest rates of newly issued cards and provide curbs on high-fee cards. When you get your monthly statements, they must include disclosures about the repayment costs for any outstanding balances. If you make only minimum payments, the statement must tell you how long it would take to pay off your balance. It also must tell you how much you would have to pay each month to repay your balance in three years.
These are welcome improvements, although like a lot of government rules, they were spurred by past problems -- huge fees and penalties levied on consumers who were slammed by the recession and struggling with big card balances they no longer could afford. These new rules may limit those problems but are causing the credit-card issuers to seek new sources of revenue that might, if not understood by consumers, become the sources of future problems. After all, the card companies also have been hammered by soaring delinquencies, and their business models need to change.
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Here are four things you should be on guard against in the wake of these new rule charges:
Stick to Fixed Card Rates. The new protections require advance notice of changes in your card terms and limit interest-rate increases on newly issued cards. But these safeguards may not apply if your cards carry introductory rates or other variable rate conditions. Avoid such variable terms if you can; if not, understand how these features work and be prepared for unpleasant rate increases.
Carefully Review Rewards Programs. Card companies are seeking additional revenue through new and expanded service fees and awards programs. These might be great for you but make sure you fully understand your financial exposure in these deals.
Foreign Use of Credit Cards. New York Times personal finance columnist Ron Lieber and others have noted that the new rules do not curb credit-card companies' ability to sock you with stiff fees for using your card to make foreign transactions. This may not even require you to actually travel outside the U.S., as these fees could be applied for simply using your card to buy something from a foreign merchant. Not all credit cards impose such fees; find out if yours does before using the card for foreign transactions.
The Tyranny of a High Credit Rating. Under the new credit-card rules, the wise course of action often may be to cancel cards once you've received advance notice of unfavorable changes. While getting rid of cards can, in some circumstances, hurt your credit rating, this still may be the best decision for you. Carrying a high credit score is nice but having a high score is of greatest concern when you're seeking new loans or renegotiating terms on existing debts. So, if you are not going to be seeking new or revised loan and credit terms anytime soon, downsizing your credit-card portfolio by getting rid of high-rate cards is a sound decision.
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