What new credit card legislation means to you.
With an incredulous tone, and seemingly out of the blue, the workshop participant does not even bother to raise her hand. “Can they really do that?” These are not ordinary times, and Trisha, our workshop participant, is merely vocalizing what everyone else was thinking—that it should be illegal for credit card companies to abruptly change credit limits, especially in the midst of an economic crisis. And especially for those of us who have been loyal, dependable cardholders for years. Shouldn’t they at least be required to give us notice so we have time to adjust?
Trisha has clearly hit a hot button with the group, and others begin to chime in. Participants share stories of standing in long lines only to have their cards rejected, being unable to buy airline tickets for work and having to face their bosses with the ugly truth that their credit card company simply is not willing to extend them any more credit. There are the graduation and wedding gifts not purchased, and stories of visiting ATMs late at night. “To hear your reduced credit line in English, press 1,” provides some brief comic relief, but the elephant is still in the room, reflected in the faces of the participants and even the facilitator—25 years into her career as a planner and it’s still hard to fathom.
How did this happen?
This same credit card legislation that was touted as a boon to consumers—a way to take back control and ensure credit card companies operate fairly—has had some consequences, and credit card companies have responded by taking swift action.
However, the Act itself has provided some relief. In addition to making it harder to impose over-the-limit fees, and no longer charging interest on fees, the Act provides a blend of long overdue measures and some common sense.
Card holders with multiple interest rates within the same credit line will have their excess payments applied first to the balance with the highest interest rate. This shifts a huge advantage to the consumers, away from the credit card companies, and will enable consumers to slash dozens of years and thousands of dollars off the cost of paying down debt.
Card companies are also required to disclose the period of time it will take to pay off the balance and the total interest cost if only minimum monthly payments are made, which can serve as a handy monthly wake-up call. Those new tennis shoes you can’t seem to resist at $60 aren’t so appealing if you buy with plastic and make only minimum monthly payments since they could end up costing over $300 when all is said and done. Once you realize the true cost you may want to wait until you have the cash to buy them.
For card companies that see the opportunity to be the first credit card in a college student’s wallet as the equivalent of staking a claim during the California Gold Rush, there will be an additional measure in place. Applications from those under age 21 have to contain either a parental co-signer or proof that the applicant has the financial means of repaying the credit.
As a result of this legislation, credit card companies are managing their risk, knowing they will have less interest income from consumers. The once sought-after customers, who barely made the minimum payment each month and ended up paying sky high interest rates on their balances for upwards of 30 years, have become less profitable for the finance companies. Accordingly, credit card companies are reining in credit limits, requiring better credit scores and taking a much more conservative approach to the amount of credit they are willing to extend.
So how can you adjust to the new credit climate? The first step is to see if you are even affected. Check your balances and available credit on each of your credit cards to see if your available credit has been lowered. You can also speak with your creditors and find out if they have any such plans for your account.
If your limit was reduced, take the opportunity to review your credit report to see if there was an effect on your score. You can also take the bull by the horns and call your credit card issuer to see if they will restore your previous limits. Depending on your relationship and history with the issuer, you may be able to get it adjusted so you might as well call and plead your case.
Pay close attention to your terms. Make a debt inventory and continuously keep track of your credit limit for each credit card account you maintain as well as the interest rates being charged. Many people don’t realize you can set alerts on your account that will inform you if you get close to your credit limit. Some issuers have this feature available on your account, so if they do, take advantage of it. This way you aren’t caught by surprise when you need access to your credit the most.
Just as important, if you haven’t already done so, devise a debt repayment strategy to better manage your debt and keep an eye on your account so you can factor in any changes to your terms or your interest rates made by the issuer.
If you really want to play hardball, keep developing money management habits that help you pay down your debt faster and strengthen your credit, which may make you less vulnerable to some of the measures that credit card issuers have resorted to in managing their risk. That will have the card issuers screaming, “Can they really do that?”
This article originally appeared at Forbes.com on July 30, 2009.
