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First, the good news: The new credit card law that recently took effect will offer cardholders more transparency and greater protection against some of the industry's more insidious practices. But some pitfalls still exist, says Adam Levin, co-founder of Credit.com and the former director of the New Jersey Division of Consumer Affairs. “It's a good first step, but it's not the silver bullet. It doesn't make debt go away, but it can help you reduce your debt,” he says. Here's what to watch out for:
1. Your Rate Could Still Go Up
The new law stipulates that banks can only raise your rate on existing balances if you are 60 days late, you've reached the end of an introductory period of at least six months, or you have a variable-rate card (more on that later). However, banks can still raise your rate on new purchases after you have had your card for a year. They must give you 45 days notice, but they can still do it. So while the $6,000 wedding debt you're paying down is relatively safe from a rate hike, the $300 plane ticket you're about to buy is not. Fortunately, the new law requires credit card companies to apply payments to your highest-interest debt first; they used to start with the lowest.
2. Watch Out for New Fees
Now that some of the credit card industry's most profitable tactics have been outlawed, executives at these companies are scrambling for ways to make up the lost income. The answer, for many, is fees. The annual fee is making a comeback, and some companies are even charging “inactivity fees” -- a financial penalty for not using your card. Many are also adding “foreign-transaction” fees, which are different from currency-conversion fees because they can kick in anytime you patronize a business that is not located in the United States -- even if the transaction happens in U.S. dollars.
3. Rates, Fees and Penalities Aren't Capped
Although the new regulations hinder banks' ability to raise interest rates, there are no caps on how much they can charge. Ditto for fees and penalties -- while there are limitations on certain types of cards during the first year, after that the costs can rise dramatically after the initial 365 days.
4. Say "No" to Over-the-Limit Programs
Prior to the law, your credit card company could process a payment that went over your credit limit -- and then penalize you heavily for it. For example, say you purchased a $70 sweater and went over your limit. Your credit card company could not only slap you with a $35 fee for that purchase, but also charge you another $35 for the $4 latte you bought right after -- and so on and so on. “Under the new law, unless you opt in, they cannot charge you any over-the-limit fee, and if they do charge you because you opted in they can only charge you once per billing period,” says Levin. So why would anyone opt in? “Many of [the credit-card companies] call it a 'protection program.' Their pitch is let us protect you from embarrassment, let us protect you from being rejected,” says Levin. Our advice: Better to suffer a disapproving look from a salesperson than a whopping fee.
5. Beware of Variable-Rate Cards
Variable-rate cards are based on the prime rate plus a percentage, which means that if you select one of these cards your interest rate will definitely go up. “Right now, the prime rate is at historic lows, so there is no question that the rate is going up,” says Levin.
