The rules your credit card company operates by will start getting much clearer on Thursday. But just because you’ll know what they’re up to doesn’t mean you’re going to like what you learn.

Regulations aimed at reigning in practices like unexpected interest rate increases and credit limit cuts start with two rules. Consumers will now be given advance warning of any major changes to the terms of their accounts, and get more time to pay their balance after receiving a bill.

These small changes come ahead of more sweeping regulations that will take effect starting in February. Those touch on matters ranging from mandating reviews every six months of accounts that have had rate hikes to limiting the credit that can be offered to students.

Card companies have been gearing up for the new landscape for months, mailing consumers a spate of warnings about fee and interest rate changes. If the notices already sent are any indication, consumers may not be happy about much of the new information they receive.

Citi, for example, is in the process of informing some cardholders that it will institute an annual fee, about $30, on certain accounts.

And American Express Co. recently sent out notice it will eliminate over-the-limit fees on its consumer credit cards in October. They were dropped in response to a provision in that law that, starting in February, requires card companies to offer a way for customers to agree to pay each time a transaction triggers such a fee.

But the good news from Amex stopped there.

The letter Cynthia Vancho received last week from Amex informing her of the fee elimination also included notice that the interest rate on her card will jump to 10.24 percent from 6.99 percent. If she makes any late payments, the rate will shoot up to 27.24 percent.

And while overlimit fees are gone, Amex changed its fees for making late payments to $19 for balances under $250, and $39 for balances over that line. The prior fees were $19 for balances under $400, and $38 for balances over $400.

Vancho, who lives in Pemberton Township, N.J., sees rate and fee increases as penalizing good customers who did nothing wrong. "They’re taking advantage of the situation," she said, maintaining that the hikes are being made to offset the cost of complying with the new rules. "I find it unfair for people who pay on time, pay over what is expected of them monthly and are basically good clients."

Amex spokeswoman Desiree Fish acknowledged the regulations played a part in recent rate and fee hikes. "The reason why we did it is to be responsive to the business and economic environment, which obviously included the recent regulatory changes," she said.

The company started changing rates and fees in November. Rates on certain credit cards like its Blue and Optima cards have risen on average 4 percent, while co-branded cards like airline miles cards are up an average 2 percent. "It’s just part of the plan changes over the past few months that we’ve been making," Fish said. Citi spokesman Samuel Wang said in an e-mailed statement the new annual fees "also reflect the dramatically higher cost of doing business in our industry."

American Express and Citi are not unique. A survey by the Pew Charitable Trusts of nearly 400 credit cards offered by the 12 largest issuers in the country found that rates have gone up on average 2 percent since December. Banks are making the moves in response to an array of factors, including the regulatory changes and a spike in the number of accounts that have slipped into default as the unemployment rate has risen, said Nick Bourke, project manager of the Pew Safe Credit Cards Project.

"They’re trying to manage a lot of uncertainty, because they don’t know what this market is going to look like once this law takes effect," Bourke said. "And they’re trying to preserve a very profitable business."
Bourke is among the industry observers who think the new law will benefit consumers.

"The things that people look at when they’re looking at a credit card are: What’s the interest rate? What are the rewards? and Is there an annual fee?" Bourke said. Problems cropped up because banks started incorporating things consumers didn’t expect, like overlimit fees and surprise interest rate hikes. "I think the transparency that the law brings will end up saving people money," he added.

Many elements of the Credit Card Accountability Responsibility and Disclosure (CARD) Act were actually echoes of regulations the Federal Reserve crafted last year that will take effect in July, noted Gene Truono managing Director with BDO Consulting, who previously worked for both Chase cards and American Express.

The aim of all the new rules is to make credit card contracts easier for consumers to understand. Previously, the disclosures on most credit card contracts were "not comprehensible to the average consumer," he said.

In that sense, things like the requirement coming in February that banks spell out on a statement how long it will take to pay off a card making only the minimum payment, and how much interest that will cost, are bound to help consumers manage their credit better, Truono said.

"It passes what I call the ‘Dolores Test,’" explaining that Dolores is his octogenarian mother. "If most consumers read them and can actually understand them, it really does have the intended effect."

Nevertheless, while the new regulations will curtail most of the practices the credit card industry has been criticized for in recent years, Truono said consumers must still stay on top of their accounts, adding, "The disclosures are only as good as the consumers who actually read them."

If you have questions about this article or need help with your debt, check out AmericasChoiceDebtSettlement.com. 

After years of getting Americans hooked on credit, card companies are slashing limits and weaning themselves off all but the safest customers

Terry Mazzera has worked to keep her credit score above 730, paying bills on time, sending in more than the minimum credit-card payment each month, and keeping a comfortable gap between her balance and credit limit. But a couple of weeks ago, the 62-year-old Hercules (Calif.) resident got a letter from a credit-card company saying that her limit had been cut from $9,500 to $6,500—just about $400 above the amount she owed on the card. The primary reason: She was late on a payment on a separate department store card.

Debt-to-Limit Ratios

Her debt-to-limit ratio on the card suddenly zoomed up from 64% to 94%, and she expects her credit score will be damaged. The ratio is a key component that credit bureaus use to determine creditworthiness. "It’s not right," said Mazzera, a project assistant at a construction company. "I worked very hard to keep my credit."

Mazzera is part of a growing number of Americans who are seeing their credit limits slashed. Even people with good jobs, low balances, and solid payment histories could be seeing their credit scores slip through no fault of their own. About 16% of customers had their limits reduced between April 2008 and October 2008, according to a recent study by Minneapolis-based FICO, which developed the Fair Isaac scoring model used by credit bureaus to evaluate default risk.

But only a fraction of those customers would be considered risky. Jittery banks, eager to reduce potential risk, appear to be targeting many borrowers with low-balance or inactive accounts. About 11% of customers who saw their limits cut had no "risk triggers" during that period and generally had very high credit scores. Risk triggers include late payments, excessive cash advances, check bouncing, collecting unemployment, or having a mortgage in an area where property values are plummeting.

Credit Scores at Risk

"This is blindsiding people," said Evan Hendricks, author of Credit Scores & Credit Reports (Atlas Books). "For a significant portion of people having their credit scores go down, it had nothing to do with what they did. This is the system making credit scores go down. This is a new thing in history."’

There’s no way to know how many good credit scores are being lowered by the credit limit cuts. FICO said its study showed that borrowers whose available credit was cut did not see a change to their median FICO score, which remained at 770. But the survey ended in October 2008, just as the financial crisis was beginning. It’s unclear what has happened since then.

Even a small FICO score drop in today’s environment of tight credit can make the difference in getting a mortgage, a car loan, or another credit card, and it can have an impact on the interest rate a borrower pays. The FICO score ranges from 300 to 850 and the best mortgage rates are generally given to borrowers who have at least about 730.
The credit limit reductions are confusing to customers because many borrowers have credit cards so that "when a rainy day comes along they can use it," said Linda Sherry, spokeswoman for Consumer Action, a San Francisco-based nonprofit consumer education and advocacy group.

"It’s hard for consumers to understand because before the credit-card companies were almost pushing credit," Sherry said. "Now they’re taking it back, even for people who were doing nothing wrong."

Rising Default Rates

Banks are cutting limits in the face of a deteriorating economy. U.S. credit-card default rates reached record highs in May, near or even above 10% for Bank of America, American Express, Citigroup, and Capital One, according to Reuters. The worsening unemployment situation is causing banks to worry that even good customers could quickly become risky customers. As a result, the companies are preemptively slashing credit lines, especially those that aren’t being used.

"The single biggest indicator of a person’s ability to repay is whether they have a job, and economists say unemployment could hit 10%," said Peter Garuccio, spokesman for the American Bankers Assn. "Issuers say their losses track closely with unemployment and they have to minimize exposure."

Garuccio said some customers who think they’re excellent customers might be riskier than they think. Somebody who just pays the minimum payment each month isn’t the ideal customer, he said. "Somebody who is paying more than the minimum and not carrying a balance is a great customer."

From Ideal Customer to Liability

Curtis Arnold, founder of Cardratings.com, said the same customers that banks were aggressively soliciting are now making them nervous.

"The irony of this is that somebody who carried a balance was their [the banks'] bread-and-butter customer," Arnold said. "Now that same customer is a threat."

The banks might be tightening available credit in reaction to new federal legislation, taking effect in the middle of next year, that will restrict how credit-card companies raise rates. Among the other rules designed to benefit customers, banks will only be able to hike rates on existing balances if a customer is 60 days late on a payment, and it must provide 45 days’ advance notice before increasing rates.

It pays in this environment to keep the balance-to-limit ratio below a third and keep a close eye on any changes to credit reports, experts say. Author Hendricks suggests consumers try to pay down balances or convince lenders to restore limits. Borrowers can access a free credit report once a year from each of the three credit bureaus at www.annualcreditreport.com. On Myfico.com, customers can buy their TransUnion and Equifax FICO scores for $15.95 each. Experian sells reports and scores on Experian.com.

The banks were bailed out last fall, the automobile companies last winter. For Edward McClelland, a writer in Chicago, deliverance finally arrived a few days ago.

Mr. McClelland’scredit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.  It’s a deal, the account representative immediately said, not even bothering to check with a supervisor. As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.

They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.

“Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.

Only a few creditors are willing to confirm the practice. Bank of America and American Express say they decide on a case-by-case basis whether to accept less than the full balance. Other card companies refuse to discuss the subject, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common.

The shift comes as the financial services industry finds itself losing some of its legendary power. A credit card reform bill that makes it harder to raise rates on existing balances and prevents certain automatic fees flew through Congress and was signed by President Obama in late May.

Borrowers still have a crushing amount of debt to deal with, however.

Revolving credit, a close approximation of credit card debt, totaled $939.6 billion in March. The Federal Reserve reported that 6.5 percent of credit card debt was at least 30 days past due in the first quarter, the highest percentage since it began tracking the number in 1991. The amount being written off was also at peak levels. After a balance has been delinquent for six months, regulations require the card company to reduce the value of the debt on its books to zero. If a borrower has not paid by this point, chances are he never will.

“The creditors would rather have a piece of something now instead of absolutely nothing down the road,” said Adam K. Levin, the founder of the consumer education Web site Credit.com.

Banks and credit card companies are discussing new programs that would, for the first time, allow credit counselors to invoke reductions of principal as a routine part of their strategy, said Jeffrey S. Tenenbaum, a lawyer for many counseling agencies. In the past, counselors could persuade card issuers to adjust interest rates and modify late fees, but the balance was untouchable.

An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.

And there can be a Catch-22: those with the fewest assets are the likeliest to receive a settlement offer, but they are also the least able to come up with the cash for that final negotiated payment. Some creditors, though, are helpfully letting people stretch this out over months.

Still, a line has been crossed, credit experts say.

“Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.

During the boom, nonpayers were treated more harshly because, paradoxically, their debt was more valuable. Collection agencies were eager to buy bundles of old debt from the card companies for as much as 15 cents on the dollar. In a healthy economy, even the hopelessly indebted can pay something.

In this recession, where collection agencies have little hope of collecting from the unemployed, that business model is suffering. Experts say 5 cents on the dollar is now the most a card company can hope to get for its past-due accounts.

Another factor undermining the card companies is the rise of debt settlement firms. These are profit-making companies that charge fees, nearly always in advance, to bargain with creditors on a consumer’s behalf.
Settlement companies are under fire from regulators, who say they promise much and deliver little. But their ubiquitous ads, which make a settlement seem not only easy but also a moral victory over shamelessly gouging card companies, have done much to spread the idea.

Although there are few independent statistics on the settlement industry, there is no doubt that some generous deals are being done.

Consider Bedros Alikcioglu, a gas station owner in Newport Beach, Calif. He owed $112,000 on four cards and was paying $3,000 a month in interest and late fees. “It was so hard to earn that money, and paying it to nowhere didn’t make sense anymore,” said Mr. Alikcioglu, 75.

He signed up with a debt settlement company named Hope Financial, which negotiated deals with his creditors to settle for about 35 percent of his balance. Hope Financial is charging Mr. Alikcioglu about 12 percent of his original debt.

“I did not want to leave the legacy of bankruptcy,” Mr. Alikcioglu said. “I am now at peace.” 

They offer new technology that shields you from harrassing collection calls!

The ACDS/DAAN home phone module (pictured on the side panel) frees the person using it to once again answer their home phone with confidence, knowing that they never have to talk to debt collectors again. This helps reduce stress and impact on their personal and professional life.  More info on this FREE service

Visit the website at  America’s Choice Debt Settlement   or call 866-951-2237 for more information!  Get back on track to financial freedom.

Some credit cardholders had a rough ride in 2008. As banks grappled with rising charge-offs and default rates, many reined in risk by restricting access to credit and adjusting existing accounts.

In fact, about 60 percent of domestic banks say they tightened lending standards on credit cards during the previous three months, according to the October senior loan officer survey from the Federal Reserve.

Unfortunately, the credit forecast is mixed. For 2009, experts predict mostly cloudy skies with a chance of silver lining.

Keith Leggett, senior economist with the American Bankers Association, says that "2009 is not going to a pretty year." With the unemployment rate expected to rise, he believes issuers will remain risk-averse.

"I think what you’re going to see (are) tighter standards being applied to get new credit," Leggett says. "You will see lenders continuing to scale back their exposure to existing lines of credit."

Expectations  – Here’s a look at what experts say is coming and what you should do about it.

Moves in ‘09

1. Minimum credit scores will rise
2. Reform measures coming
3. Sustained squeeze on existing cardholders
4. Rewards programs may be scaled back
5. Fewer direct mail solicitations

1. Minimum credit scores will rise
"Underwriting is a moving target," says Curtis Arnold, founder of CardRatings.com. A year ago, Arnold said consumers needed FICO scores of 700 or better to get the best credit card rates and limits; now he says 730 is the minimum. "That target is going to continue to change and tick up going into the first half of next year."

At the lower end of the spectrum, "folks that may have qualified this year or last year for a subprime card with a 575 or 600, this time next year may not qualify for a card at all."

According to the Federal Reserve’s senior loan officer survey, about 50 percent of domestic banks indicated they had raised the minimum credit score needed for credit cards, and nearly 60 percent approved fewer applications for people who didn’t satisfy the credit scoring requirement.

Your best money move: Take steps to improve your credit score. Check your free credit reports at www.annualcreditreport.com and dispute errors that may be weighing down your score. Apply for credit only as needed.

2. Reform measures coming
The Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration issued credit card reforms in late December that take effect in July 2010. The regulations crack down on universal default, double-cycle billing and hiking rates on existing balances.

President Barack Obama also has made reforms part of his agenda, and there are bills pending in Congress.

Arnold fears that such added regulation may bring about the end of zero-percent balance transfer offers and teaser rates on credit cards if issuers react by making credit more expensive for everyone.

Promotional offers already aren’t as generous as they were a year ago. "I’m predicting in 2009 that this trend will continue, and it could exacerbate to the point that we just never see any zero-percent offers anymore, for example," Arnold says.
We also may see some fees change and new ones implemented under the new regulations, says Ken Paterson, director of the Credit Advisory Service at Mercator Advisory Group, a research firm for the consumer payments industry in Maynard, Mass.

Your best money move: If promotional offers do go extinct, Arnold suggests trying balance transfer cards that offer a low rate for the life of the loan. Another option is getting a card from a smaller bank or credit union, which tend to offer more consumer-friendly terms. Use our comparison tool to find the best credit card.

3. A sustained squeeze on existing cardholders
"I think credit lines are going to continue to be cut," Arnold says. "I think that’s a trend that’s going to continue as issuers try to hedge their risk." He predicts that issuers also will keep raising rates, closing unused accounts and increasing underwriting standards.

As of Nov. 19, the average interest rate charged on all cards was 12 percent for fixed-rate cards and 11.27 percent for all cards. However, banks aren’t hesitating to raise rates on people with imperfect credit. Major card issuers indicated to Bankrate in October that they are placing applications and existing accounts under heavier scrutiny for risk and closing inactive accounts deemed too risky.

About 60 percent of U.S. banks reported slashing lines for nonprime borrowers during the past three months, and 20 percent reduced limits for prime cardholders, according to the senior loan officer survey.

Having lower credit limits can make cardholders appear closer to being maxed out because the balance uses up more of the available credit. The result can be a lower credit score, which can invite changes to other accounts and make loans more expensive.

On a positive note, smaller credit lines may help curtail spending temptations.

Your best money move: Don’t invite scrutiny. Pay on time, reduce debt and keep statement balances below 30 percent of the credit limit. Use emergency-only cards once every six months to keep them active, and pay them off. Read every mailing from your issuer and complain if you notice an adverse adjustment. If you plan to retaliate by closing an account, understand what canceling a card does to your credit score.

4. Rewards programs may be scaled back
While rewards programs are expected to stick around, issuers may scale back rebates to consumers if legislation passes that would reduce interchange fees collected on transactions. Interchange fees are paid by a merchant’s bank to a customer’s bank when someone uses a payment card. They help fund the rewards programs of card issuers.

"I do think there’s going to be some tinkering around the promotional categories, maybe scaling back on some of the cash-back categories where, say, gasoline or some other purchase has been incented higher," Paterson says.

He says the worst-case scenario would be a situation where issuers start devaluing points, just like airline rewards programs have done with miles. Consumers would have to spend more to earn the same rewards. But it’s too early to tell whether that will happen with non-airline rewards cards.

Your best money move: If you have points or miles you can cash in, do so sooner rather later. As a consumer, you have little recourse if the issuer decides to abolish the rewards program or change the terms.

5. Fewer direct mail solicitations
Consumers are expected to have received 1 billion fewer credit card solicitations this year than in 2007, according to projections from Mail Monitor, a credit card acquisition tracking service from Synovate, the market research arm of Aegis Group PLC.

Happily for consumers who find themselves annoyed or tempted by credit card offers, economist Leggett expects the downward trend to continue. "This is not the right time to be going out aggressively pursuing customers," he says.

As many as 70 percent of issuers are scaling back efforts to acquire cardholders, according to a July 2008 report from Javelin Strategy & Research in Pleasanton, Calif.

Consumers still might get offers from banks where they already have accounts.

Paterson speculates that banking relationships may take "a more important role in securing credit cards." Banks have more information on existing customers and may be more willing to extend credit to them.

Banks already are stepping up efforts to communicate with their customer base, albeit for other reasons. They sent 42 percent more direct-mail solicitations to their customers in the third quarter of 2008 versus the second quarter, according to a report from Chicago-based Mintel Comperemedia.

Your best money move: If you don’t want to receive credit card offers, opt out of them at OptOutPrescreen.com. You can opt out for five years, or permanently if you mail in a form.

Other smart moves

• Build a savings cushion. Financial crises happen. Don’t let a job loss or vehicular breakdown send you reaching for your credit cards. They’re an expensive way to finance emergencies, and issuers may penalize you for piling on thousands of dollars in debt all of a sudden. Pad your safety cushion by saving three to six months’ worth of living expenses in a liquid savings account. If that goal sounds unrealistic, try this suggestion: "Start by socking away 10 percent of each paycheck. You’ll really never miss it, and yet at the end of a year you’ll have a little more than one month’s income in the bank," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, or NFCC, in Silver Spring, Md.

• Don’t wait to get help. If you are falling behind on your payments, get help sooner rather than later. 

A temporary financial problem, such as a job loss, is a good reason to contact your issuer if you’re struggling to make payments. Most have in-house help programs that can lower your interest rate or waive fees for a short period of time, usually three to six months.

Cunningham says that if consumers are experiencing a long-term financial problem, such as a divorce or major medical expense, they might want to contact a credit counseling agency for help. Visit the NFCC’s Web site to find a counselor.

If you have questions about this article or need help with your debt, check out AmericasChoiceDebtSettlement.com. 

IT’S THE GREAT Catch-22 of the lending world: To get new credit, you need a solid credit history. However, you can’t build a credit history if you can’t gain access to credit.

Now, as banks and credit-card issuers tighten their lending requirements, building that all-important credit history is even more challenging. Consumers with a credit score below 700 (on a scale of 300 to 850), for example, only have a hit-or-miss chance of getting approved for a loan, says Liz Pulliam Weston, author of "Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future." Consumers with no credit (say, an 18-year-old heading off to college) or bad credit (as a result of bankruptcy or some other major financial mishap) are even worse off.

But that doesn’t mean building up credit — even in today’s tough environment — is impossible. Here are some ways that can help:

1) Apply for a secured credit card
If no credit-card offers arrive in the mail and past attempts to get approved for one have ended in vain, then apply for a secured credit card, advises Curtis Arnold, founder of information site CardRatings.com.

With secured cards, applicants make a deposit – say, $200 to $500 – which serves as the credit limit on the account for the next 12 to 18 months. (Since borrowers are borrowing against their own funds, lenders tend to be more lenient about application standards.) As long as the cardholder pays on time and keeps their balance in check, the issuer typically promotes them to a regular, unsecured card.

One thing to note: Interest rates and fees on some of these cards can be painfully high. The New Millennium Bank Secured Gold card, for example, carries a 19.5% APR, a $59 annual fee and a $69.95 application processing fee. Others are more reasonable. Orchard Bank’s Secured card carries a 7.9% rate and waives its $35 annual fee during the first year. When signing up, request that the card issuer reports your transaction history to all three credit bureaus, says Arnold. (Not all do.) To find a list of secure cards, visit CardRatings.com, as well as Credit.com.

2) Take out an installment loan
Even a small loan shows up on a credit report, helping to improve a person’s score, says Weston. And banks are still willing to offer short-term installment loans, which require a fixed payment each month, especially to those who offer up collateral or a co-signer. To find the best rates, shop around at community banks and credit unions. "Their rates are better, and they tend to look beyond your score," she says.

3) Build an alternate score
Alternate scores consider payment records for things like rent, utility bills and checking accounts, says Craig Watts, spokesman for Fair Isaac (FIC), which developed the FICO credit score formula. Fair Isaac offers the FICO Expansion Score, which automatically collects such data. Credit bureau Payment Reporting Builds Credit lets consumers enter records manually on its site or report them electronically through their bank’s bill payment service. (PRBC charges $20 to verify a rental history and $15 to verify other types of accounts.) Other specialty reporting bureaus to consider: ChoicePoint for insurance and tenant reports and ChexSystems for checking account reports.

Before paying to build a report, make sure the lender you’re considering is willing to use an alternate score, warns Weston.

4) Piggyback
Ask a family member or close friend to add you as an authorized user on their credit account, ideally one with a long history of low balances and on-time payments. Account-authorized users gain all the positive (and negative) history of the account. Your low score won’t affect the primary cardholder’s credit — they can even block you from using the card. Just be sure to keep tabs on the account. Any problems — say, a late payment or overcharged balance — can hurt your score.

5) Sign up for retailer credit cards
Economic woes aside, retailers traditionally carry less strict standards when it come to approving applicants for store charge cards. Compared to a MasterCard (MC)- or Visa (V)-branded card, it’s less risky to offer credit solely within one store or chain of stores, says Scott Bilker, founder of money management site DebtSmart.com.

Just don’t overdo it. Holding too many store cards can weigh down a credit score. And with rates that can top 30%, be sure to pay off your balance in full each month.

6) Keep any current accounts healthy
Pay bills on time, even if you can only make the minimum payment, advises Arnold. And keep balances low — lenders like to see that you have lots of available credit, but that you aren’t using more than 30% of it, says Bilker. Even if you pay off your balance in full each month, it’s that end-of-statement bill that the credit bureaus see. (For more tips on raising your score, click here.)

If you have questions or need help with your debt, check out AmericasChoiceDebtSettlement.com.