Protecting Yourself Against Further APR Increases

The Federal Reserve announced today that it will keep short-term interest rates near zero for an "extended period". This means the prime rate will remain at 3.25%, its lowest point in decades

But most consumers are now paying the highest interest rates in years on their credit cards.

According to the LowCards Complete Credit Card Index, which tracks the APR on the 1000+ credit cards in the United States (http://www.lowcards.com/CreditCardIndex.aspx ), the average advertised APR last week was 13.55%. On May 21, 2009, the day before the CARD Act was signed, that average was 11.64%. Nearly every issuer has taken interest rate hikes on their portfolio of cards, including some of the most popular cards on the market. At the end of 2008, the advertised rate for the Capital One Platinum Prestige was as low as 7.15%; today it is as low as 11.90%. Blue from American Express had an APR as low as 8.99%; today it is as low as 15.24%.

"The CARD Act was passed to protect consumers from punitive credit card practices, but the CARD Act is also one of the reasons that cardholders are paying higher interest rates. Issuers had to find ways to make up for the revenue they'd lose due to the Act's provisions and interest rate hikes have been one of them," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

"If the prime rate starts to increase, just about every credit cardholder will see an increase in their APR because so many cards are variable rate cards that have an index tied to the prime rate. As the prime rate goes up, those increases can be passed on to cardholders. Since a number of analysts and experts are predicting that the Fed could start raising rates later this year, consumers should not be surprised to see an increase in their APR by year's end," says Hardekopf.

What should cardholders do today to protect themselves against these potentially higher interest rates?

1. Pay down your credit card debt
Before the CARD Act went into effect, issuers converted fixed rate cards to variable rates. When the Federal Reserve starts raising interest rates, the APR on all variable rate credit cards will also increase. Pay down as much of your balance as soon as possible.

"If you get a bonus, tax refund or birthday money from your parents, use that to pay down your balance. Instead of eating out, use that money to make an immediate online payment. Anything you can pay above the minimum payment is going to help you pay off your debt," says Hardekopf. "The only cardholders who won't be affected by rate increases are the ones who pay off their entire balance every month."


2. Ask for a lower rate
This is not as easy as it used to be because issuers are no longer competing to keep every customer. However, the dust is starting to settle for credit card lenders. If you have an excellent credit score and a good payment history, you may have some leverage to request a lower rate.


3. Transfer your balance to a lower rate card
If you have excellent credit and your APR is over 15%, you should consider transferring your balance to a card with a lower interest rate.

If it will take you more than a year to pay off your balance, look for a card with a low ongoing low interest rate because a low APR for the long-term is likely to be more important than the length of the introductory period. If you can pay off your balance in less than a year, apply for a card with a 0% APR for 12 months on balance transfers.

Look at the fine print. Some 0% introductory offers only apply to future purchases. Some have language that says the rate is good for "up to" a certain number of months. Confirm the balance transfer fee--most issuers charge a 3%-5% fee for the transfer and you must calculate whether it is worth incurring this fee to save on the interest payments.


4. Pay attention to your mail
Issuers can still increase your rate on future purchases, but they are required to provide a 45-day notice of the increase and explain your right to opt of the change.

"Notices are typically sent in plain, white envelopes that are easy to miss. But if you don't see your notice and miss your chance to opt out, then you are stuck with the higher rate," says Hardekopf.

Micropayments: A Faster Way to Pay Off Credit Card Debt

Paying down debt is similar to losing weight--we know it is good for us and we need to do it, but it is hard to find a program that we can stick to and accomplish our goal.

Both challenges may have the same solution--smaller portions more often. For credit card debt, this means making smaller payments throughout the month instead of one large payment at the end of the month. These are referred to as "micropayments".

While we are conditioned to pay our credit card bill once a month, consumers can actually make payments more often. Some banks and issuers allow payments to be made as often as once a day.

Why does increasing the number of payments make any difference? Micropayments can have a significant impact on the amount of interest you pay.

If you carry a balance, credit card companies charge daily interest. Make your payment at the end of the billing period, and you will pay interest on the full balance for that entire billing period. Pay more often and you reduce your balance and hence, the interest you pay each month.

One easy strategy is to divide your monthly bill in half and pay that amount every two weeks. By the end of the year, you will have made 26 payments or the equivalent of 13 monthly payments. The extra monthly payment resulting from this payment plan will enable you to pay down your debt at a faster pace.

To make sure you keep to your schedule and don't run the risk of missing a payment, sign up for an electronic transfer of your funds to take place every two weeks. In addition, call your credit card company and verify that you can make separate payments and have it credited to your monthly minimum.

"The smaller micropayments are a good psychological tool to take control of your credit card debt. They provide faster results and even a little immediate gratification that keeps you motivated. Instead of eating out or splurging on something that you don't need, you can immediately apply that money to your debt," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

There are several other advantages to making micropayments:

* You have better control of your payments. If you are paid weekly or bi-weekly, money can slip away by the end of the month, and it is sometimes difficult to pull together enough for the minimum payment. Designate a specific day after you are paid to send in a payment for your credit card. Four $50 payments or two $100 payments are sometimes easier to make than a monthly $200 payment. It is also easier to add a little extra money to smaller payments.

* The higher your interest rate, the more you will save. This is good news for the many cardholders who have recently received rate increases and now pay up to 30%.

* In time, micropayments can help raise your credit score. An organized, scheduled payment plan can help you avoid late payments and pay more than the minimum due. Both of these are important elements for a good credit score.

* Micropayments can reduce financial stress. Making payments right after payday at a time when you actually have the money reduces anxiety and financial stress.

"The ability to save money and pay down debt also makes the debt burden a little less overwhelming and can even give you a feeling of control," says Hardekopf.

The disadvantage to the micropayment plan is that it takes time, organization and financial discipline to make the plan work and this may be difficult for some people.

"It takes time to pay down debt and it is easy to give up after a few months. Stick with this because getting rid of debt is an important step for financial security," says Hardekopf.

If you have more than one card with a balance, keep paying the minimums for each card, but pick one card and pay it off first. Select either the card with the highest interest rate (save more money) or the card the the lowest balance (pay it off faster). Stop charging on that card, using another card for purchases. Make your minimum payment by the due date.

Ask your credit card issuer how often you can make a payment and if they have any restrictions or limitations. Some issuers have no limitations; others might only allow payment every third day. It can take as long as two to five business days for the payment to appear on your online credit card statement.

Credit Card Tips for the International Traveler

We are quickly approaching the travel season. If you are taking an international trip, the journey is never inexpensive, but choosing the right credit card can help cut costs. Most credit cards add as much as a 3% international transaction fee to the cost of your purchase.

"This international transaction fee is assessed to any purchase whether it's a $3 piece of pizza or a $5,000 piece of art. Travelers can avoid this fee by comparing credit cards and choosing the right card before you go," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Capital One is currently the only major issuer that does not charge a foreign transaction fee. If you make a $500 purchase, using a Capital One card will save you up to $15."

Pentagon Federal Credit Union recently eliminated the 2.5% international transaction fee from the PenFed Premium Travel Rewards American Express Card.

Each time you use your credit card outside the United States, the network (American Express, MasterCard, Visa) that processes the transaction charges your bank a percentage of the transaction (typically 1%) to convert dollars to the local currency. The bank that issues your card also charges a fee for the transaction (typically 2%). The currency conversion fee or international transaction fee will appear on your credit card statement.

Current rates for international transaction fees:
Capital One 0%
PenFed 0%
Discover 2%
American Express 2.7%
Bank of America 3%
Chase 3%
Citi 3%

Before you leave, contact your issuer to ask about the fees you will pay for international transactions and if there is a minimum for the fee.

Using a credit or debit card at foreign ATMs also adds additional fees. Before departing, ask your bank what the charges are for foreign money transactions and for "foreign" ATMs In addition to the international transaction fee, the ATM may also charge its own fee for withdrawals. If you plan to use your debit card, contact your bank to see if they have partner banks in the areas you are traveling. These partner banks may waive the withdrawal fees. Bank of America is a member of the Global ATM Alliance Bank that waives the fee if your bank is a member.

ATM fees on international transactions vary widely. Bank of America charges a $5 withdrawal fee, plus a 1% international transaction fee. Chase assesses a $3 withdrawal fee for non-Chase withdrawals outside the United States plus a 3% conversion fee. Citi charges a 3% fee after conversion to American dollars, plus $1.50 per transaction.

Here are some other credit card tips for international travel:

* Cash Advances. Avoid using your credit card at an ATM to get cash. The fee is typically 3% or $10, whichever is greater. You will also immediately be charged the much higher interest rate for cash advances. The cash advance rate can be as high as 25% for some issuers.

* Take a second card. Keep in mind that not all cards are widely accepted. If American Express is your primary card, it is not accepted everywhere, so have a MasterCard of Visa as a backup card. Discover does not have an extensive network in Europe and probably should not be your primary card.

* Notify your bank and credit card issuer about your trip. While you are asking your bank about foreign transaction fees, tell them that you will be using your card while traveling out of the country. Otherwise, the foreign charges may raise a red flag with your issuer and a freeze could be placed on your account.

* Take the phone numbers for contacting your bank from outside the United States.

* You don't have to leave the United States to be charged a foreign transaction fee. Issuers recently broadened the definition of a foreign transaction. It is no longer limited to a purchase in a foreign country. Some issuers now charge a 3% foreign transaction fee on transactions made or processed outside of the United States. Making a purchase in the United States could cost an additional 3% of purchase if that online merchant is in another country. Previously, the fee was not added when
foreign transactions were made in US dollars.

Credit Cards Undergoing Changes Around the World

The United States is not the only country that experienced a credit meltdown or government regulations for the credit card industry. Other countries are going through similar situations. Here is summary of the credit card changes taking place in other parts of the world.


AUSTRALIA
Australia started enacting credit card regulations in 2003, during a time of prosperity and years before the global recession. However, this regulation benefited retailers, not consumers.

In 2003, the Reserve Bank of Australia responded to retailers' complaints about interchange fees and passed regulations to reduce the hidden costs and fees of credit cards. It forced banks that issued Visa and MasterCard to reduce their interchange fees from roughly 0.95% of the transaction to approximately 0.5%. While this was good news for retailers, it was lost revenue for banks and issuers, who turned to cardholders to make up this revenue. According to the New York Times, issuers decreased credit card rewards and frequent flyer miles, as well as cutting the grace period from 55 days to 33-44 days. In addition, some issuers increased annual fees
for reward cards.

The regulations also gave merchants the right to impose surcharges for credit card transactions. In some cases, the new fees exceeded the old ones.

Today, the interchange fee is a hot topic for American retailers who are disappointed it wasn't included in the CARD Act. According to the General Accountability Office, consumers and businesses spent about $48 billion in these interchange fees in 2008.

Issuers are lobbying against changing the interchange fee because they claim the fee brings consumer benefits such as more rewards, reduced fraud, lower interest rates and system innovations. They warn that lower fees will force them to squeeze credit and raise the cost of credit cards.

"After our experience in this country with the CARD Act, we have learned that regulations usually increase the cost of business for credit card issuers and they will find a way to pass on these additional costs to the cardholders," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Consumers may benefit from reform in the short run, but reform isn't free."


UNITED KINGDOM
The government in the UK is attempting changes that are similar to those in the United States. The UK Cards Association, which represents the credit card industry, is voluntarily making some of the changes and implementation is required by the end of the year.

Government proposals require issuers to:

* Change payment allocation so that cardholders pay off the more expensive debt first.

* Provide better communication to inform cardholders that making only the minimum repayment is the most expensive way of paying off a debt.

* Stop raising borrowers' credit limits without their consent.

As in the United States, issuers in the UK are increasing interest rates and reducing risk to adjust for the growing default rate. The average rate charged on a credit card had reached 16.25% by the end of December, up from 15.58% twelve months earlier. This is the highest rate since October 2006.


CANADA
Canada passed credit card regulations in September 2009 that are similar to the CARD Act. They went into effect January 1, 2010.

Regulations required issuers to:

* Inform consumers how long it takes to repay the balance by only making the minimum payment.

* Give a 21-day interest-free grace period on all new purchases when a customer pays the full balance.

* Fairly allocate payments.

* Obtain cardholder's consent before increasing the credit limit.

* Provide advance disclosure of rate increases before they take effect

Ottawa is also proposing legislation that would give the federal finance minister the authority to regulate the market conduct of the credit and debit card networks and their participants, if necessary.


MEXICO
Mexico is attempting to place limits on interest rates and fees. In February, Mexican lawmakers approved a proposal that lets the central bank establish reasonable ranges on interest rates that banks can charge for credit cards.

According to Reuters, credit card interest rates in Mexico have fallen over the past year, from over 40% on average to 32%, in part because some banks offered incentives to encourage cardholders to reduce their balances during a slumping economy. Bank executives say interest rates are high because of the greater risk of default and weak laws to recover debt.

Credit Card Debt Declines Again

The Federal Reserve released a monthly report on Wednesday that shows
credit card debt continues to decrease at a significant rate.

Revolving credit, which is primarily credit card usage, fell for the 17th consecutive month in February, declining at an annual rate of 13.1%. The $858.1 billion in revolving credit represents a $100 billion decrease since the fourth quarter of 2008.

"Consumers seem to be taking some steps to reduce their credit card debt, some of it out of necessity, some voluntarily. They are using cash and debit cards more often and charging less on their credit card, possibly due to the APR increases they have seen. But significant actions by the issuers have also contributed to this decrease," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Nearly 42% of consumers are using more cash than they were a year ago, according to a survey by the consulting firm Market Strategies International. A study by BIG Research in January showed that 30.5% of the respondents said they would pay with cash more often, up from 23.0% a year earlier.

Debit card usage is increasing. According to their annual reports, MasterCard's debit card usage in this country increased 10.5% in the fourth quarter of 2009 versus year ago levels, while Visa reported a 17% increase.

But the actions of issuers have also helped decrease credit card debt.

"To protect themselves from future risk, issuers have closed accounts, cut the credit limits on millions of customers, and have become much more selective on which customers receive approval on a credit card," says Hardekopf.

There are signs that steps taken by issuers to reduce risk may be working. Bank card defaults fell to 4.39% in the fourth quarter from 4.77% in the prior quarter, according to a report released this week by the American Bankers Association.

The drop in defaults is not by accident. In a recent letter to shareholders, Jamie Dimon, CEO of JP Morgan Chase, said, "the industry as a whole reduced limits from a peak of $4.7 trillion to $3.3 trillion. While we believe this was proper action to protect both consumers and card issuers, doing so in the midst of a recession did reduce a source of liquidity for some people. Ultimately, however, the change may make the card business a more stable and better business."

He also said that in the future, Chase will have to reduce risk in light of the new regulations and they will "no longer be offering credit cards to approximately 15% of the customers to whom we currently offer them."

He admitted that Chase reduced limits on credit lines and canceled credit cards for customers who had not done business with Chase over an extended period.

Link to Jamie Dimon's letter to JP Morgan Chase shareholders:
http://media.ft.com/cms/1d11280c-3d20-11df-b81b-00144feabdc0.pdf

Link to the latest Federal Reserve Consumer Credit statistics:
http://www.federalreserve.gov/releases/g19/Current/

Confusing Provisions of the CARD Act

The dust has settled, now that the Credit CARD Act has been in effect for over one month. But consumers and issuers are both finding some hazy areas in the new provisions. In some cases, this confusion was brought about by Congress not spelling out how these provisions were to be implemented.

Here are examples of some confusing elements of the CARD Act:

1) Limiting credit card offers to young adults under 21. The CARD Act requires that young adults must have a job with enough income in order to be approved for a credit card, or they must get an adult to co-sign on the account.

"This is still a gray area of the CARD Act. Issuers have not yet specified a standard income level that is needed from the young adult to be granted approval. What proof of income has to be shown and how will it be verified?" says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Several issuers have added some questions regarding income on their online applications.

Citi student applications ask: "Do you have a checking account, savings account, money market account? What is your yearly income including wages, stipends, scholarships and grants? Do you have any outstanding loans?"

Bank of America now includes this statement: "Federal Law requires that we collect income information to determine your ability to pay. If you do not have income, we may request a guarantor."

"Even the 'may request a guarantor' in this statement makes the provision a little less concrete," says Hardekopf.


2) Proof of income. This is now required on new credit applications. Consumers must prove their ability to make required payments before they can open a new credit card account or increase the credit limit for an existing credit card account. Congress did not provide guidelines on how to verify income.

"We are still waiting to see how issuers will find a solution that quickly and efficiently handles income verification. This is a good idea, but it slams the brakes on instant credit, and retailers are protesting that a delay in approvals will hurt sales. In the past, instant approval for a credit card was based on your credit score and customers were able to both apply and shop on the same day with that credit," says Hardekopf. "Issuers aren't told how to do this. Will it be the
honor system where consumers fill in the income line on the application and that is good enough?"


3) Issuers must provide a toll-free number for credit counselors in the monthly statement. When cardholders call the number, the issuers must give a name, phone number and address for at least three organizations that have been approved by the U.S. Treasury or a bankruptcy administrator.

Bankers and the American Bankers Association were against this provision because it would give the appearance that banks endorse specific credit counselors. The credit counseling industry has had problems with a few dishonest agencies and banks want to distance themselves from this as well as avoiding any suggestion of favoritism and a risk to their reputation.

Each issuer handles this recommendation differently. Some stay out of it as much as they can, giving a list with all 158 approved agencies. Citi refers inquiries to three specific nationwide agencies with which it already has a strong relationship.

"This is still a good provision for consumers with severe debt problems because it can help them find a reputable debt counselor. However, if credit card debt is a significant issue, we recommend that you first try to work out a debt settlement with your credit card issuer," says Hardekopf.


4) Fairer distribution of payments. The CARD Act requires a different distribution of payments. The minimum payment is still applied to the balance with the lowest interest rate. If a cardholder pays more than the minimum payment, the remainder will be applied to the balance with the highest rate.

"If you carry a balance, this can be a very helpful provision of the CARD Act. However, some issuers have doubled the monthly minimum from 2.5% to 5% during the past year for some cardholders. If your minimum payment has doubled, it may be difficult to pay more than the minimum payment and take advantage of paying off your debt at a lower rate," says Hardekopf. "By increasing your minimum payment, issuers keep you paying the highest rate for a longer period of time. The CARD Act does not restrict issuers from raising their minimum payment requirement. Of course, the good
news is that the more you pay on your balance, the faster you will pay off your debt."

Cancelled Credit Card Debt Could Be Taxable

Cardholders who had some credit card debt forgiven in 2009 may be surprised to discover that this forgiven debt may be viewed by the IRS as taxable income.

If you have arranged a debt settlement to pay less than your balance to close a credit card account, and the amount is over $600, you will need to pay taxes on the forgiven debt.

There was a surge in credit card debt forgiveness in 2009. According to the IRS, more than 2.5 million people will be receiving 1099 forms, because they owe income taxes on forgiven debt from car loans or credit cards.

When you have cancelled credit card debt, your lender will send you a Form 1099-C showing the amount of the cancelled debt. If you know you had some cancelled debt but don't recall receiving a Form 1099-C, call your issuer to request one. You will still owe the tax even if you don't remember receiving the form or can't find it.

Banks are also forgiving mortgage debt but the government treats this differently. The Mortgage Debt Relief Act of 2007 rules that until 2012, most taxpayers will be able to exclude the assumed income from the discharge of debt on their principal residence.

"If consumers are negotiating a debt settlement on their credit cards, they should keep all paperwork and records of any conversation with their issuer," said Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "If you did receive some debt forgiveness, it may be a good idea to get the help of a tax adviser before you file your income taxes because this can get complicated. There are several exclusions concerning debts discharged during bankruptcy and debts of people who are insolvent."