Buried in your wallet is a credit card that's older than the lava lamp in your rec room. You rarely use it, but you don't want to close the account because that could hurt your credit score. Plus, it's always nice to have an extra card on hand in case the one you regularly use is lost or stolen.
Soon, though, that orphaned credit card could cost you money. Credit card companies are expected to implement a variety of new and creative fees to cushion the impact of a credit card reform bill signed into law last year. Under provisions of the law that took effect Feb. 22, card issuers can no longer increase interest rates on card holders' outstanding balances.
Last week, the Federal Reserve Board proposed rules that would prohibit credit card issuers from charging customers an inactivity fee for failing to make new purchases with their card. That's good news for infrequent card issuers. But the rules wouldn't put any restrictions on credit card companies' ability to slap an annual fee on your cards, says Bill Hardekopf, chief executive of LowCards.com. Nor do the rules prevent credit card issuers from reducing your credit limits or closing your accounts.
How to cope with this changing environment? Some suggestions:
•Use your cards. Even if you never pay a dime in interest, you generate revenue for your credit card issuer every time you use your card. That's because merchants pay an "interchange fee" to card issuers when credit cards are used to make purchases. To cope with an expected loss of interest income, credit card issuers are looking at ways to reward customers who frequently use their credit cards — and get rid of those who don't.
To avoid having your account closed, use all of your credit cards occasionally, says Kenneth Lin, chief executive of Credit Karma, a website that provides free credit profiles. Even small purchases, such as a tank of gas once a month, will make you a more valued customer in the eyes of the card company, he says. You may still decide to get rid of cards that add an annual fee. But this strategy allows you to decide which cards you want to keep.
•Maintain good credit. The number of credit card issuers that charge an annual fee has increased in recent months, but there are still good deals out there. Just last week, for example, Chase announced that its Chase Freedom card will increase cash-back rewards to 5% on some seasonal purchases, with no annual fee. "There are still going to be some great no-annual-fee cards around for quite a while unless there's some drastic change," says Curtis Arnold, founder of CardRatings.com.
But in response to rising defaults, credit card companies have tightened their credit standards. That means you'll need good credit to qualify for the best deals, Lin says.
Credit card comparison sites such as LowCards.com, CardRatings.com and IndexCreditCards.com can help you search for the best deals. "Competition is still alive in the industry," Lin says.
•Weigh rewards against annual fees. While the Chase Freedom card doesn't charge an annual fee, many rewards cards do. Others offer tiers of fees, based on the rewards provided. In that case, you need to determine how much you need to spend to earn the rewards. In some cases, the most generous cash-back rewards won't kick in until you spend a specific amount.
If you're an infrequent credit card user, you may be better off with a non-rewards card that doesn't charge an annual fee. There are still plenty of those cards available, Arnold says.
•Check out cards issued by credit unions. Only 11% of cards issued by the largest credit unions charge an annual fee, vs. 16% of cards from major banks, according to a July 2009 survey by the Safe Credit Cards Project at The Pew Charitable Trusts. The median annual fee for credit union-issued cards was $15, vs. $50 for cards issued by the largest banks, the survey found.
Credit cards issued by credit unions also have lower penalty fees. The median late payment fee for credit union cards is $20, vs. $39 for bank-issued cards, the survey found.
The Fed's proposal would limit late-payment fees to no more than the minimum payment. For example, if your minimum payment is $20, your credit card issuer wouldn't be allowed to charge you $39 for paying late.
The rules are scheduled to take effect Aug. 22. For more information, go to www.federalreserve.gov.
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