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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Beware the New Hazards of Plastic

by Laura Rowley

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Very Good (204 Ratings)
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Posted on Thursday, June 25, 2009, 12:00AM

A recent study finds that more credit card holders are being penalized by their card issuers as companies try to maximize profits and bring balance sheets in line ahead of a law banning unfair practices.

The ink is barely dry on the Credit Cardholders’ Bill of Rights Act, signed by President Obama in May, but the legislation doesn’t take effect until February 2010. According to the June survey of 1,000 consumers by Credit.com, a card-comparison and informational Web site, one-third of respondents said their card company made one or some combination of changes to their accounts:

* 19 percent said the card’s interest rose (up from 15 percent in a February survey);
* 14 percent said fees increased;
* 14 percent said the firm lowered their credit limit (up from 8 percent in February);
* 12 percent said their minimum payment increased;
* and 9 percent said their rewards program was cut back.
 
“It’s certainly open season on consumers between now and when the law goes into effect in February,” says Adam Levin, co-founder of credit.com and a former director of the New Jersey Department of Consumer Affairs. “There may be fee increases that are purely front-running of the law, and you could also have consumers who have run into problems because of the economy.”

Americans carry about $850 billion in credit card debt, which translates to about $17,000 for the roughly 50 million households that don’t pay their credit card balances in full every month, according to the Consumer Federation of America. Among other provisions, the new law prohibits retroactive interest rate increases on existing balances unless a consumer is 60 days late with a payment; bans “universal default” clauses, in which credit card companies raise their rates because the consumer is late paying another creditor; and eliminates over-limit fees, unless the consumer has specifically opted in to allow over-limit transactions.

The Dark Side of the Law

While it eliminates the most onerous practices, the law is expected to result in more annual fees, higher interest rates, and reductions in rewards programs -- especially for the most credit-worthy customers -- as companies try to offset the loss of their juiciest pockets of profit.

The new law “is not a silver bullet,” Levin says. “There will be an enormous amount of room for credit card firms to operate -- they can cut your limit or close your account at the drop of a hat.” If you rely on a single credit card, it may be worthwhile to open a backup account -- to avoid the risk of being shut out from credit altogether.

If you carry multiple cards, beware the unused piece of plastic. One of Levin’s employees, for example, had a credit score in excess of 815 (800 is considered excellent) and a card company reduced his credit limit by 60 percent. “Their argument was he wasn’t using his card enough,” says Levin. “If they give you a $25,000 credit line, they have to have a reserve against the $25,000. They are trying to limit their risk and exposure, and also see where they can rebalance the balance sheet. One way to do that is not carry enormous reserves -- and so they cut credit limits.” Levin suggests using 10 percent of your credit limit, always paying the bill in full at the end of the month.

Meanwhile, companies have shown no lack of creativity when it comes to fresh penalties, such as the “foreign transaction fees” slapped on transactions conducted in U.S. dollars but processed outside the U.S. Levin cites the example of a consumer who was hit with a 3 percent fee for purchasing tickets on a Malaysian airline. “The fee wasn’t an inconsequential number because it wasn’t a cheap ticket,” says Levin, adding that the tariff differed from the more common currency conversion fee because the payment was made in U.S. dollars.

Watch Out for Transfer Fees

If such practices prompt you to roll your balance over to a new card, watch out for balance transfer fees. Companies are charging transfer fees as high as 4 percent -- with no maximum limit. So if you roll over $10,000 in debt to a 0 percent card, you could pay $400 for the privilege.

Economic pressure and credit card shenanigans are prompting Americans to pay down debt at historic rates. Earlier this month the Federal Reserve reported that consumer credit fell by more than $15 billion in April -- the second-highest decline on record, and the seventh consecutive month that Americans paid off more than they borrowed. Revolving debt, which includes credit cards, tumbled by $8.6 billion, an annualized rate of 11 percent. The savings rate has soared to 5.7 percent, the highest in 14 years, according to the Commerce Department. (Some Americans are destroying cards in ritualistic ways and documenting their efforts on YouTube.)

Meanwhile, some consumers are negotiating outright settlements directly with credit card issuers, paying as little as 50 cents on the dollar. But Levin says there are potential pitfalls in the strategy. The credit card firm will report the charge-off to the credit bureaus, and a consumer’s credit score could fall anywhere between 50 and 200 points, according to Levin. “You have to look at it as a foreclosure on your credit report -- you can’t get much worse than that,” he says.

In addition, a settlement could trigger a significant tax bill. Any amount over $600 that is forgiven may be subject to income tax. “If you can prove to the Internal Revenue Service that you were technically insolvent at the time of the charge-off, there are cases where the IRS will waive the tax,” says Levin. “But the problem is when people do nothing, and the following January a 1099 shows up from the credit card firm. Then they try to reconstruct where they were financially at the moment of the settlement, and end up paying a tax they may not have had to pay.” The first call you make after you’ve cut a deal to settle credit card debt should be to a tax professional to discuss the tax ramifications.

As Americans work to shed debt, more people are favoring debit cards over credit cards. Banks are developing strategies to drive debit card use, including new reward programs, to boost the interchange revenue they collect from merchants. “It’s all about fee generation,” says Levin. With credit card fees on the downswing, says Levin, “the banks are saying, ‘what can we do now, how much can we make, and how fast can we make it?’”

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74 Comments

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  • bushwacked - Thursday, July 2, 2009, 11:47AM ET  Report Abuse

    • Overall: 4/5

    My wife and I haev always paid off our card every month. In addition, the credit card companies pay US a 5% rebate on gasoline purchases and food. Thank you Mastercard! The card is nothing more than a convenience to us. If they want to charge us monthly on our balances, then we will get rid of the card and us debit card. You can never go wrong with being conservative in your spending habits. If you don't need it and don't have the money, don't buy it!

  • Yahoo! Finance User - Thursday, July 2, 2009, 2:24AM ET  Report Abuse

    • Overall: 1/5

    glass houses can be hazardous also

  • MDTERP - Thursday, July 2, 2009, 1:05AM ET  Report Abuse

    • Overall: 5/5

    I was trying to think of another possible way that the credit card companies could really screw with you, and came up with this one: having interest accrue immediately or very soon after a purchase is made with a credit card. Am I starting to get paranoid?

  • cannon - Wednesday, July 1, 2009, 1:58PM ET  Report Abuse

    • Overall: 4/5

    Plenty of people don't get it. If u have a balance, a good rate, good terms, u can't just go find another one these days. Card companies are pulling back, & now pushing back, trying to take back deals they made when times were good, '06 or '07. They went after these customers with letters, bt checks in the mail, telling them what a good deal this was, begging them to xfer a balance, or take some cash for house renovation, etc. Now times are not so good for them, so who do they pressure? The customer who still pays his bill every month on that good deal. The card company should not be able to dump consequences of bad business decisions on customers who are paying as agreed.

  • Jim SFG - Wednesday, July 1, 2009, 11:37AM ET  Report Abuse

    • Overall: 2/5

    American consumers have made their bed and now they have to lie in it! Credit card companies don't hold a gun to your head and tell you to spend above your means, do they? If you don't like it your current card, find another! Competition will be back, but you better believe that the banks will make money. Spend wisely my friends, spend wisely...

  • corporate_pawn - Wednesday, July 1, 2009, 10:44AM ET  Report Abuse

    • Overall: 3/5

    Ya gotta love the uppity comments from people who think they got a better place to look down on others from. Like geoman who has this great cc company. But what if that wunderful cc, what if they up & waited til they convinced ya to carry a bigger balance with a low, low rate, then they say hey -- ya gotta pay us 2.5 times what ya been payin, yeah, thats what the slimebag cc companies are doin, chase is one.

  • gert - Wednesday, July 1, 2009, 5:31AM ET  Report Abuse

    • Overall: 3/5

    CC for emergency find but to spend spend spend what u cannot affordto keep up with the jones no good alot of folks think they are the rockefellers and can afford everything

  • scarred for life - Wednesday, July 1, 2009, 12:39AM ET  Report Abuse

    • Overall: 4/5

    Credit card companies like Chase, for example, are willing to alienate millions of customers by changing terms arbitrarily. They will find themselves trying to sell a product that no one will buy except those who have no other choice. Many of us are resolving to avoid using the credit cards of companies who are taking advantage of hard times to squeeze every drop of disposable income from people who have, heretofore, managed to avoid bankruptcy. Thanks Chase, for pushing a lot of 'em off the edge. We hope to do the same for you some day soon.

  • Hotblack - Tuesday, June 30, 2009, 11:45PM ET  Report Abuse

    • Overall: 5/5

    "Live within your means" is not rocket science advice. But the stars are deserved for pointing out the potential pitfalls of negotiating a settlement with the CC companies. How it affects your credit score and taxes is an important caveat.

  • RobertM - Tuesday, June 30, 2009, 8:04PM ET  Report Abuse

    • Overall: 3/5

    I rate this as only good because Laura misses a key point, if you have very good credit you can shop around a get a favorable credit card and you can negotiate a better deal. Just forget about the rewards nonsense and find a card with low interests, no annual fees, and reasonable late fees. It can be done. The card I use 95% of the time has a zero payment requirement if you make more than a minimum payment the previous month and has only $15 penalties (which I never incur). The card I seldom use always requires a payment and has a narrow payment window, before they hit you with steep fees.

  • HarryW - Tuesday, June 30, 2009, 2:34PM ET  Report Abuse

    • Overall: 5/5

    Ever notice how OUR SUPPOSED REPRESENTATIVES.... "Crack Down" on the corporate thieves, while giving them plenty of time to rip you real good? Dem or Rep makes no difference. They're all in bed together!

  • MichaelA - Tuesday, June 30, 2009, 1:54PM ET  Report Abuse

    • Overall: 4/5

    Be sure that you get good tax advise on write downs. Our accountant told us not to worry about the 1099's for approximately $27,000 in write offs when we filed about 12 years ago. Three years later IRS wants penalties and interest on what they considered to be $27k in unreported income. Oddly enough our tax person was unavailable to assist us. The Attorney told us to stop paying on the cards so he could ask for a settlement less than the full amount $50k. This created about an additional $2-3k in late and over the limit fees. Also we had to pay in full to the card cos. the amount they settled for immediately. To pay I borrowed against 401k plan which then cut my paycheck in half due to the terms of that loan. To pay the IRS we made payments to them which left us broke and dismal credit scores for the next approx 7 years. So no refinance of the house when the interest rates went down to record lows. Now the cards I have increased the rate to 26.99% even though I have never been late and always pay more than the minimum. If I make a large payment they reduce my line by about 80% of the amount. When I asked why they raised the rates they said it was to maintain the profitability of the acct 15.9% wasn't profitable enough? I told the poor rep on the phone that I felt sorry for them that their employer was so greedy and that I would be both embarrassed and ashamed to work for them. Debit cards are the way to go. The only good card I have is thru a major membership store and the card co they use. 11% int rate and rebates from them and the membership store. between the two of them I received a little over $180 in cash rebate last time and that wasn't even for a full years use. This card and a debit card are my goal.

  • Howard - Monday, June 29, 2009, 4:43PM ET  Report Abuse

    • Overall: 4/5

    Hopefully in the long wrong the consumer will win. Who ever heard of penalizing your best customers....At the end of the day the customer is buying the bank are selling...."Let's beat up and penalize our best customer" a great marketing strategy...more to come!

  • Yahoo! Finance User - Monday, June 29, 2009, 11:43AM ET  Report Abuse

    • Overall: 4/5

    CLOSE YOUR BANK ACCOUNTS AND JOIN A CREDIT UNION! Good article. I have a very high credit score and have had one account closed by B0fA and credit limit reduced to just hundreds of dollars above my balance on another card with the same firm. My suggestion as a consumer to all consumers is this....GO TO A CREDIT UNION! Give the banks what they deserve. Credit Unions are member owned. JOIN A CREDIT UNION and go to hades with the banks!

  • barbara - Saturday, June 27, 2009, 1:13PM ET  Report Abuse

    • Overall: 3/5

    I am using my debit card more because I get paid 4% on my checking account for using the debit card 10 times a month. I also have a rewards credit card that I pay off each month. I'll use whichever method pays me the most, though I agree the credit card is much more convenient.

  • Thomas - Saturday, June 27, 2009, 9:13AM ET  Report Abuse

    • Overall: 1/5

    i hit the wrong star-the article is very good-not poor the star i hit.

  • Yahoo! Finance User - Saturday, June 27, 2009, 12:57AM ET  Report Abuse

    • Overall: 4/5

    Good story, not a great story. The facts are these, credit card companies/banks have gone beyond the bounds of reasonable behavior. They, as many other companies, made the decision that their customers had nowhere else to turn, and therefore they could abuse the customer without limit or repercussion. The changes that are falling out from this behavior have barely begun, and will shortly accelerate as the real world economic downturn shows up more and more on the average citizens bottom line. Shortly, there will be few to none with a credit score that doesn't demand 20% interest rates or higher, as banks drop credit limits to the amount owed, which will drop credit scores, which will allow for dropping limits again, which will drop the scores, etc. Bet on laws that restrict the use of credit scores to only companies offering credit to a particular consumer for a particular purpose to be before Congress before the end of next year - most don't seem to know that credit scores affect insurance rates and hiring chances, to name two utterly unrelated items. Financial systems seem to last fifty to eighty years or so, long enough to become "normal", then they vanish into the dust of history. This one is quite old by that standard, has overstayed it's welcome, and it's time for the reign of "king credit" and his wife "queen plastic" to end. I do not know what will replace it, but it's not going to be much like the current system at all. Any more than the current system bears any close resemblance to the system of banking and credit prior to 1927.

  • Yahoo! Finance User - Friday, June 26, 2009, 11:28PM ET  Report Abuse

    • Overall: 3/5

    Credit cards are a great convenience if 1) you pay them off in full each month and NEVER carry a balance month to month and 2) There is a reward associated such as airline miles or free hotel nights. Debit cards are for only those who cannot pay their balance in full. People who mistakenly think of aredit cards as a bank loan past the grace period are forever trapped into slavery of interest payment

  • Josephine - Friday, June 26, 2009, 5:10PM ET  Report Abuse

    • Overall: 4/5

    I just hope that after everything we have been trough with the credit card companies people will realize that they do not need them, at least not at such a huge expense. Living within your means and save up to buy larger items will bring you earlier retirement for about 4-5 years. So if you want to work longer years just for the banks, go ahead. I will not.

  • JoeB - Friday, June 26, 2009, 4:01PM ET  Report Abuse

    • Overall: 4/5

    you would think our lawmakers would have seen this happening. Oh wait. They did. Even us responsible users are now going to be subject to usage and annual fees to pay for irresponsibility (sound like obama's plan?) Credit cards are necessarry to purchase items over phone or internet. Debit use is a bad bad idea. Your balance is subject to fraud and is uninsured. The biggest companies are the biggest crooks. (I have solid evidence of debit fraud by many major companies through my own experiences.) All I can tell you is pay your balances and read the fine print. GE credit just fine printed their way out of a 24 0% interest contract with me 5 months before maturity. (800 credit score). Who's on our side?

  • tom - Friday, June 26, 2009, 2:45PM ET  Report Abuse

    • Overall: 3/5

    As usual, the article is aimed that those who carry a balance from month to month. For the rest of us, nothing has changed. My card issuer tried to reduce my credit limit from its usual $50k and after I called them on it, they said they were doing it to almost all consumers but if a customer complained, they set it back to the original amount. The insidious foreign transaction fee continues to be a pain in the rear.

  • Landy Johnson - Friday, June 26, 2009, 2:08PM ET  Report Abuse

    • Overall: 4/5

    RE: richard g - Friday, June 26, 2009, 12:55PM ET & Johnny - Friday, June 26, 2009, 12:36PM ET What? Are you serious? STOP USING THE CARDS. Live within your means and the credit card interest rates are not an issue. You don't have a RIGHT to a new car, you don't have a RIGHT to a big house or fancy apartment. If you can't afford it, DON'T BUY IT. Period.

  • Yahoo! Finance User - Friday, June 26, 2009, 1:20PM ET  Report Abuse

    • Overall: 2/5

    Anyone notice this article in Yahoo Finance? "The decision that could revive your retirement plan" "Recovering from last year's portfolio losses won't take as long as you think, according to a new study. Planning to work for just a year or two longer may do the trick.." Wow, fabulous idea. Between Wall Street and the banking sector, the only rational response sems to be non-participation. Wake up call for us suckers..

  • Justine - Friday, June 26, 2009, 1:06PM ET  Report Abuse

    • Overall: 1/5

    how are these "new" hazards?

  • richard - Friday, June 26, 2009, 12:55PM ET  Report Abuse

    • Overall: 4/5

    The only real change that matters has not been enacted. A usury law setting the maximum interest and fee rate at 15% must be implemented and the banks are fighting like crazy to prevent it. Without a usury law the CCHBOR is nothing more than an irritant for the credit card companies. We need real reform and the first step is usury laws.

  • Yahoo! Finance User - Friday, June 26, 2009, 12:36PM ET  Report Abuse

    • Overall: 4/5

    Credit card companies are pure evil. First they gouge vendors then they gouge customers. They prey on people not paying attention. At least a mugger is honest to your face.

  • Yahoo! Finance User - Friday, June 26, 2009, 12:35PM ET  Report Abuse

    • Overall: 1/5

    weak. both the article and the new rules.

  • Got it in L. A. - Friday, June 26, 2009, 12:17PM ET  Report Abuse

    • Overall: 2/5

    Don't forget to mention that while credit card loss due to fraud is limited to $50, debit card losses due to fraud are not protected at all - your bank account could be completely looted, including your over draft protection account. The best advice is don't carry any debt, especially the higher interest rate unsecured debt like a credit card. Even if all you pay is simple interest, that's still a hefty monthy of $$ you don't get to use - effectively a corporate tax on your income. Debt is the enemy!

  • Laplace - Friday, June 26, 2009, 12:05PM ET  Report Abuse

    • Overall: 3/5

    From a tax standpoint the 1099-C Cancellation of Debt is considered income by the IRS and this debt is taxable to the individual receives it. The only exception where this cancellation of debt is not considered taxable income to the IRS is the debt was cancelled through bankruptcy filing.

  • Jed - Friday, June 26, 2009, 10:54AM ET  Report Abuse

    • Overall: 5/5

    Five stars for this sentence, “It’s all about fee generation,” says Levin. With credit card fees on the downswing, says Levin, “the banks are saying, ‘what can we do now, how much can we make, and how fast can we make it?’”

Showing comments 6-35 of 74<< PreviousNext >>
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