Credit Card Practices

Your credit score just dropped, but you didn't do anything wrong.  Millions of borrowers are in the same boat. Someone changed the rules of the game and consumers are the ones taking the hit. And fair or not, it couldn't have come at a worse time.

Remember when credit cards were the best things ever? We Americans were in love with the notion of buying goods and services without having to carry cash. And for a nominal fee, we could carry a balance on our bill and pay it off over time. It was credit heaven.

So what happened?

It's simple: the credit card industry figured out it could make BIG money off Joe Consumer by upping the interest rates on those balances and charging exorbitant late fees. Now, instead of loving our credit cards, we have become slaves to them, and we hate them.

According to a recent J.D. Power and Associates poll, credit cards are the nation's least favorite financial product. They ranked lower than mortgages, and in this era of foreclosures that's a pretty strong indication that credit cards are widely disliked. People based their opinions on the fact that late fees have increased and limits have fallen, sometimes without warning.

Big bank credit card issuers are surely in line for some of that bad consumer feeling as well. Many Americans are angry and upset that though big banks took our taxpayer dollars to bail them out from financial ruin, they are not willing to do the same for their loyal and longtime customers and help consumers (and our economy) through these hard times. Just as credit card hatred is driving consumers to find other options, the big bank attitude could be driving consumers to find alternatives to them, too. Small community banks and credit unions--who, by the way, have lower interest rates and have never asked for or received a federal bailout--are reaping the benefit by gathering more new customers, many of whom used to bank at the biggies.

Maybe it's about time. We've wised up to the greed being practiced by the credit card companies and big banks and now--while we can't live without them--we can find ways around them.

Five Balance Transfer Mistakes to Avoid

If you are stuck with a high-interest credit card and your credit card provider refuses to lower your interest rate, you may consider transferring your outstanding balance to a new card. In order to attract customers, many credit card companies offer incentives, such as a 0% interest rate for a limited amount of time, for new account holders. Before you agree to a balance transfer, however, make sure you know exactly what you are getting into. Balance transfer mistakes can cost you money, damage your credit score, and leave you deeper in debt.

1. Closing the Original Credit Card Account
After transferring an outstanding balance to a new credit card, many individuals close their old accounts. Closing your old account may seem perfectly reasonable, especially if you have no intentions of using the account again in the future. It can, however, have a negative effect on your credit score.

The age of your credit history is responsible for 15% of your credit score. If your original credit card account is one of your oldest accounts, closing it will shorten the length of your credit history and change the way your credit score is calculated. This can result in a lower score. In addition, the credit scoring formula takes into consideration the amount you owe on your revolving accounts and your spending limit. The lower the ratio is between the two, the better you can expect your credit score to be. When you close a credit card account, the spending limit is no longer factored into the credit scoring formula and your score my suffer.

2. Not Verifying the Spending Limit Ahead of Time
A credit card company will not notify you of the spending limit you qualify for until your initial application is approved. After the application is approved, you may call to inquire about your spending limit at any time. It is vital that you know your what your spending limit is on the new card before you initiate a balance transfer. If the amount of the balance transfer is greater than the spending limit on your new credit card, you may lose the low introductory rate by going over the spending limit with your transfer.

3. Not Considering Balance Transfer Fees
Some credit cards will charge you to transfer your balance. Balance transfer fees are often a percentage of the balance you are moving to the new card. These fees can be substantial if you plan to transfer a high balance. Some banks charge as much as 5% of your current balance to conduct a transfer. Therefore, if your current balance is $1000, you could expect to pay a fee of up to $50. If your balance is closer to $5000, however, your balance transfer fee could be up to $250.

4. Ignoring the Default Interest Rate on the New Credit Card
Low introductory rates on new credit card accounts are only temporary. After the introductory period, the interest rate will default to a higher rate. It is possible that your new interest rate could be as high as the rate on your old account. It could even be higher. Should this occur, you will be left repaying your debt under the same unfavorable terms you thought you had left behind. If you know your credit score, you can call the credit card company and ask which interest rate you qualify for. Although your interest rate is not set in stone, this will give you a good idea of whether you will end up with an interest rate similar to the one you already have.

5. Losing the Low Introductory Rate
If you do not closely follow the terms of your new credit card agreement, you may lose your low introductory rate before the rate is scheduled to expire. Making a late payment or going over your spending limit can cause the low introductory interest rate to be revoked, depending on your credit card provider. Read the fine print of your new credit card agreement to find out what will cause your interest rate to reset.

If you are trying to get out of debt, a balance transfer may be very beneficial to you. You can take advantage of the low introductory rates offered by other credit card companies to pay down your current credit card debt. By avoiding common balance transfer mistakes that many consumers make, you can pay down your debts while maintaining a good credit score.

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See: Consumers are mad as hell and not taking it anymore -- from the banks! And while the big banks are banking on bigger fees -they're bringing on more public outrage.

 

Sarah Byrnes of AFFIL and partner of AFFIL Ira Rheingold, Executive Director and General Counsel for the National Association of Consumer Advocates talk more about credit card reform and borrowers rights on ListenToSpotLight.com