Credit card lenders have moved quickly to change the terms of their cards in advance of new federal regulations, and consumers are feeling the effects through higher interest rates and fees.
A recent survey by the Pew Charitable Trusts looked at advertised credit card interest rates, and found that lenders have increased rates to consumers between 13 percent and 23 percent.
Congress passed the Credit Card Reform Act earlier this year, and it's scheduled to go into effect in February 2010. The goal is to curb new fees and rate increases, but many credit card companies are hiking rates and fees now in advance of the new law taking effect.
Because of that situation, congressional leaders are now debating whether to move up the effective date to Dec. 1.
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Minnesota Public Radio's Michael Caputo answers some questions about what's happening with these credit card changes, and shares the experiences of people in our Public Insight Network.
How are people reacting to these higher interest rates?
I'd put them in three categories:
1. The people who want to close out their credit card account, because the rate has gone up so much. But they are afraid to do that, because they don't know how their credit score will be affected.
2. The people who are just angry at the changes. They say, "Wait a minute. I've been really loyal to you. Why are you doing this to me?"
3. People who need to rely more on their credit cards to help them make ends meet.
Dale Petrie of St. Paul is in that situation. He lost his accounting job nine months ago, and just recently saw the interest rate on his credit cards jump from 12 percent to 19 percent. He saw his credit line on one card go down from $33,000 to $3,800.
Petrie said he never carried a balance before on his credit cards. Now when he needs it -- and he's strapped for cash -- it's all changing.
"Now I'm forced into a situation to survive, to pay for my family's needs. I've got to use what I've got to use to keep my head afloat," said Petrie. "I decided to charge on these cards ... pay 11-12 percent for now because the interest rate is so low and it's probably not going to go anywhere. But all of sudden they jack it up by 8 percent."
What do the credit card companies say about why they're doing this?
They're saying it has nothing to do with the Credit Card Reform Act, and it's got everything to do with the economy. Borrowers present a greater risk in these times because it's a tough economy. The American Bankers Association basically blasts the Reform Act by saying it limits lenders' ability to manage risk and to prudently conduct business.
Should consumers just close out those credit card accounts? What happens when you do that?
According to everyone that I talked to, your credit score is going to drop. That's because when your available credit drops, that's a mark against you.
When you see your credit line cut or when you get rid of a card entirely, you are getting rid of some of your available credit. Sometimes credit bureaus look at the ratio of what's available to you to what you owe, and that mitigates the problem. But it's probably going to drop, and it depends on what your balance is thereafter.
So is it better to just stop using the credit cards but keep the accounts open?
We talked to a financial planner in our Public Insight Network, Andrea Eaton, and she suggested that you should just close the account even if your credit score takes a hit.
But if you do decide to keep the account open, you have to have the discipline to keep from using the card, and that can be hard for some people.
And even if you go that route, and don't carry a balance on your card, the companies are still going to nick you through more fees.
In the past, a lot of credit card companies would make their money through the interest rates they charged, but didn't charge an annual fee. Now, you are seeing more cards start charging fees. So if you're willing to pay the $30-$60 annual fee, then it might be worth hanging onto the card.