How Presidential Election Could Affect the Credit Card Industry

Last year, Democratic senators started investigating the practices of the credit card industry. This month, the"Credit Cardholders Bill of Rights Act of 2008" was introduced in the House of Representatives. Democratic Senators and Presidential candidates Barack Obama andHillary Clinton are also using this issue to appeal to voters. Both candidates propose strong, but similar, changes to the industry.

In December, Obama helped introduce a five-star ratings system for credit cards so that consumers can easily understand the rates and fees associated with the card.Cards will be awarded stars on a point system. For example,card issuers that change their rate or fees for any time, for any reason, will receive a one-star rating. Those giving 90-day advance notice will receive more stars. "Under this rating system, they predict that most cards will currentlyreceive only one or two stars," says Bill Hardekopf, CEO of LowCards.com.

Obama proposes his own credit card "bill of rights" while Clinton proposes Fair Credit for Families, but both wouldmake many of the same changes:
* Prevent Universal Default.
* Require issuers to first apply payments to the credit cardbalance with the highest rate of interest.
* Apply interest rate increases only to future debt, notcurrent debt.
* Only charge interest on the loan. Stop charging intereston the fees.

In addition to these changes, Clinton would cap interest rates at 30%, require lenders to get cardholder written consent before they increase the rate or change the terms, end double-cycle billing, and establish uniform payment deadlines.

She would also create a Financial Product Safety Commissionto monitor financial products.
"Getting tough on credit card issuers is an easy platform point, especially during this time of credit crisis and economic struggles when issuers are raising rates. It iseasy to villanize this industry and demand changes for the average household," says Hardekopf. "Many of the changes are supported by both candidates, and would be good for consumers. However, these changes that are good for consumers will significantly cut interest and fee revenuefor the banks that issue these credit cards."

While the momentum is building for changes to be made, thecredit card industry is warning about the consequences. Theysay that changes and new regulations can impact how credit cards will be priced and affect their ability to offer low rate alternatives. "If these changes go through, we can expect the credit card issuers to react and find ways to maintain their revenue," says Hardekopf. "One way may be to raise the standard rates for everyone, not just those inpoor and average credit categories."

Republican candidate John McCain has not released his position with the credit card industry.

If Your Credit Card Interest Rate is Increasing....

This is a turbulent time in the credit card industry. Most credit card issuers are division banks which are under financial pressure after large losses with subprime loans. They are also losing money because an increasing number of their credit card customers are having their own financial struggles and defaulting on credit card loans. Meanwhile Congress, fueled by complaints from the public, is conducting an investigation and demanding changes. The tension has heightened as some issuers increase rates during a time that the Federal Reserve is dropping rates to help
consumers and the economy.

Despite a cut of 2.25 points in the federal fund rate since September, some of the more popular cards have barely budged with their variable rates. The rate for Blue from American Express was 12.24% in September, dropped to 11.74% in October, and is currently back up to 12.24%. Chase Freedom actually increased its rate from 14.24% in September to 17.24% in January. Bank of America has also received public criticism for recently notifying customers about rate increases even though they are current on their payment and have maintained their credit score.

"We are in an environment where credit card companies seem to be increasing rates based on their own financial needs, and not because of an increased risk or action by the cardholder," says Bill Hardekopf, CEO of LowCards.com. "As banks continue to deal with large losses, they are aggressively searching for a formula that includes higher rates and fees that will help maintain their revenue. This is not a good situation for many consumers that are already struggling to pay for a mortgage and credit card debt."

Here are some tips on what to do if your credit card rate
increases:
* Pay attention to your mail and notices from your credit card company. Some cardholders are receiving a mailed notice of a rate increase and being given the choice to either close the account and pay off the balance at the current rate, or keep the card and pay at the increased rate. If you choose to close the card, they give you a short deadline to mail an "opt-out" letter to them with your request to close the card (you must write a letter, they do not send you a form). If they do not receive your "opt-out letter", they will automatically increase the rate.

* Every month, look at your APR on your monthly statement. If your rate increases, call and ask for a lower rate. If you have a good credit score and good payment history, don't quietly accept the rate increase. You have some room to
negotiate. If they don't lower your rate, then it is time to comparison shop to find a lower rate card.

* Check your credit report, It is possible that your rate increased because of a change in your credit report, or your credit score dropped. Look for errors that should be corrected, or changes that you can make to improve your
score.

* Shop around for a card with a lower rate. While issuers seem to follow each other with rate and fee increases, this is still a competitive industry. If you have a good credit record and score, you should switch to a card with a lower
rate.

"Don't just apply for the first offer you receive in the mail that advertises a low rate. Take time to comparison shop and look at the terms and conditions for each card," says Hardekopf. "Credit applications show up on your credit report, so choose one or two cards. If you still don't like the offer, cancel the cards, check your credit report to see if there is a reason for your higher rates, improve that,
then apply for another card in 6-12 months."

* If you are in a situation where you are stuck with the rate and the card, contact your issuer to work out a payment plan. It is in their best interest to keep you paying something toward your debt, instead of defaulting on the
loan.

* If you choose to close your account, inform the issuer in writing with a letter sent by certified mail. Get them to acknowledge that you are the one closing the account. Keep a copy of the letter and the "closed by customer" acknowledgement in your personal records. If you pay off your balance, also keep a copy of the check. After the account is closed, cut up the credit card so that you won't accidentally use it again.

Don't Use a Credit Card to Pay Taxes...with One Exception

Don't Use a Credit Card to Pay Taxes...with One Exception

April 15 is only two months away. Soon credit card issuers will be promoting credit cards as the way to pay your taxes. In almost every instance, you should avoid paying your taxes with your credit card. However, the Citi CashReturns credit card does provide an interesting exception to the rule this year.

The convenience of paying with a credit card isn't free. The IRS uses third-party service providers to process credit card payments. They charge a fee that is typically 2.49%. If you pay the IRS $10,000 through one of these providers, your fee to use a credit card will be at least $249.

"If you carry a balance, don't forget to include interest payments in your calculations. If you pay only the minimum payment each month, it will be very expensive to pay your taxes with a credit card," saysBill Hardekopf, CEO of LowCards.com. For example, if you use your credit card to pay $10,249 (the total of your IRS payment and yourfee) and your interest rate is 14%, and you pay just the minimum each month, then you will pay an additional $8,760 in interest payments and it will take you 296 months (almost 25 years) to pay it off.

Even if you receive rewards for your payment, the rewards are not worth the fee. Rewards are typically 1% of the purchase amount, well below the 2.49% fee.

American Express even suggests that you use Membership Rewards to pay the convenience fee. "This is a terrible idea for cardholders. It will take 49,800 reward points to pay for the $249 fee. That is almost two airline tickets," says Hardekopf.

The exception to the rule this year is the Citi CashReturns credit card. It currently offers 5% cash back for three months and there is no limit to the cash you can earn. This is the one time where paying your taxes with your credit card is a good idea because you will make an extra 2.63% on the amount that you owe.

If your tax bill is $10,249, you will receive $512.45 cash back. After the $249 fee, you will make $263.45.

"This is the only instance we have found where someone might want to use a credit card to pay taxes," says Hardekopf. "If you owe a sizable amount in taxes, you can make a little extra cash. It is a good idea to apply now and start paying as soon as possible to take advantage of your three-month window. The clock starts when you apply for the card and Citi could end this offer or change the terms at any time."

If you do make your payment with a credit card, do it correctly. The IRS has contracts with two companies to accept credit card charges:Official Payments Corporation and LINK2GOV. You may pay by phone oronline. Do not forward your credit card information into the IRS anddo not write the credit card number on the form. If you receive a tax rebate, be financially prudent and use it to pay down your credit card debt.

Disturbing Credit Card Development in the United Kingdom

The United Kingdom is experiencing a credit and mortgage crisis that is similar to the United States. They have the same debt and credit card problems as well.

Last week, an Internet bank based out of the UK, Egg, sent out a letter to 161,000 credit card customers saying that it was closing their credit card account due to high risk. However, many of those customers affected say that they have excellent credit and pay off their balance each month.

If this indicates a philosophy shift for credit card issuers, the same thing could happen in the future in the United States.

"It seems that Egg is getting rid of people that it does not make much money off of, the consumers who pay off their bills each month. Analysts and reporters are questioning this move and raising the possibility that other issuers may do the same thing," says Bill Hardekopf, CEO of LowCards.com. "It may never happen again, or may not happen in the United States, but it is something we have to be aware of because Egg was purchased by the American bank Citigroup last year. This may be a test for
them and could be used with other cards or perhaps in other markets.

"The credit card industry is a business and these companies are always trying to increase their revenue. Issuers are facing problems and losing money with growing defaults from their high-risk customers. From a numbers and revenue standpoint, it might be hard to justify making free loans to people who pay the full balance on time every month. Add in rewards, and this group costs the issuers money. It would not be surprising to see more issuers make adjustments to find ways to make a little money, or possibly charge a slight fee, on consumers who have excellent credit," says Hardekopf.