Joseph Strickland, 55, of Brooklet, Ga., has used credit cards for years, and he's never made a late payment. So he was more than a little perturbed last year when he received a letter from Capital One, informing him that the credit card company planned to increase the 7.9% interest rate on his $7,000 balance to 17.9%.
Strickland scraped together enough money to pay off all but $1,000 of the balance. Then he received another letter from Capital One, informing him that his credit limit had been cut to $1,400 from $7,900.
Fed up, he paid off the remaining balance and closed his account.
"I was pretty upset with them and willing to take the hit on my credit score not to do business with them any more," he says. (A Capital One spokeswoman cited "external challenges" as the reason for an increase in some customers' rates last year and says the company gave them plenty of time to opt out.)
Congress enacted legislation last year that targets the industry's most controversial practices. Some of the most significant provisions became effective Monday. But consumers will still need to be vigilant. If you're a regular credit card user, here are some tips for making the most of the new protections:
•Pay off your balance. The new provisions prohibit credit card issuers from raising interest rates on existing balances, except under certain circumstances. But that doesn't mean your monthly payments will remain the same. Your credit card issuer could increase your minimum payment, says John Ulzheimer, director of consumer education for Credit.com.
In addition, if you decide to opt out of a rate increase on future purchases, you may be required to pay off your balance in five years. That could lead to sharply higher payments for card holders with large balances, Ulzheimer says.
If you've somehow managed to ignore the high cost of paying just the minimum amount, you'll get a monthly tutorial from your credit card company. The law requires issuers to include a "minimum payment warning" on your credit card statement. This section will explain how long it would take to pay off your balance if you pay only the minimum amount, and will provide an estimate of the interest you would pay.
•If you can't afford to pay off the balance, at least pay more than the minimum. Most credit card issuers charge different interest rates for different types of credit. For example, you might pay one rate for a cash advance, another for your purchases, and still another if you transferred a balance from another card.
In the past, most card issuers applied payments to the balance with the lowest rate first. Now, they're required to apply anything over the minimum to your highest-rate balance first. That saves you money, but only if you pay more than the minimum each month.
•Pay on time. Once you're more than 60 days late on a monthly payment, your credit card issuer has the right to raise the interest rate on your outstanding balance.
You can bet your issuer will take advantage of this exception, and the law doesn't restrict the amount of the increase. Credit card issuers are required to restore the old rate after six months if you make on-time payments.
•Keep track of your credit card limits. The law prohibits credit card companies from charging over-the-limit fees unless card holders sign up for the service.
You won't have to worry about triggering a $39 fee because a cup of coffee pushed you over your limit. But this also means that you could be rejected for purchases once you've hit your limit, which may be lower than you think. Credit card companies are still allowed to lower your credit limit or close your account without advance notice. In recent months, credit card issuers have lowered credit limits for thousands of card holders, a trend that's likely to continue, says Ben Woolsey, director of consumer research for CreditCards.com.
•Read your mail. Credit card companies can still charge annual fees, transaction fees and other types of fees. However, they're required to give you 45 days' notice, which gives you time to opt out and get a new card.
That means you should open everything you get from your credit card company, even if it looks like it's just junk mail, says Josh Frank, senior researcher for the Center for Responsible Lending. You should read the notices stuffed in your monthly statement, too.
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