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Why Credit Cards Will Still Burn You

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Some good news: Today's the day that the much-ballyhooed Credit Card Reform Act goes into effect, offering consumers some new protections against surprise rate hikes and hidden fees.

This is a good thing, at least for credit card holders -- for once, the ballyhooing is on target. Among the key provisions:

  • No more retroactive rate hikes. You know that thing the banks used to do where you were a week late with the payment and they doubled the rate on your whole huge balance? They can't do that anymore. Rate changes can only be applied to new charges, not pre-existing balances.
  • No more rate bait-and-switch. Unless you sign up for a variable-rate card or are more than 60 days late with a payment, rates can't be raised on a new account until it's 12 months old -- except when an introductory rate expires by its original terms.
  • No more shell games with payment due dates. From now on, they'll have to be the same every month.
  • No more targeting students. Citigroup (NYSE: C  ) pulled this one on me in college, and AT&T's (NYSE: T  ) old financial services company and American Express (NYSE: AXP  ) (among many others) got many of my friends back when I was in school. The idea was this: Give young people with no significant income a credit card, wait for them to run it up, then threaten dire circumstances in the hopes that the young person's parents (or somebody) will bail them out. No more -- cards can't be issued to anyone under 21 unless an over-21 adult cosigns, or unless the student has enough independent income to demonstrate an ability to pay off a card balance.
  • No more expensive surprises. Unless you have a variable-rate card, the banks now need to give you 45 days notice before they increase your interest rate, start charging new fees, or make other major changes to the terms of your card.

It all looks like good stuff, and there are more changes that will take effect this summer.

But if you think credit cards just became a happy, benevolent force for good, think again.

Meet the new banks, same as the old banks
New rules to curb the worst of the abuses made famous by supersize credit card issuers like Citi, JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) and Capital One (NYSE: COF  ) are certainly welcome, but they aren't going to change the two biggest factors in America's ongoing battle with its credit cards:

  • Issuers will still strive to maximize profits. They can't pull the old tricks, but they will certainly think up new ones as they strive to improve their profit margins. Annual fees are already back in vogue, along with new charges like "inactivity fees" and higher charges on balance transfers. Moreover, with Visa (NYSE: V  ) and MasterCard doing their best to extract as much in merchant fees as possible, I suspect it's only a matter of time before a completely new set of dubious tactics emerges.
  • Running a balance is still a bad idea! If we've learned anything from the financial disasters of the last two years, it's that spending more than you earn is a bad plan. A standing credit card balance is a money sink as well as a source of constant low-level worry for many -- but hugely profitable for issuers.  

If you want to get rich and stay rich, paying off your plastic in full every month is a great place to start. If you have a balance now, make paying it down a high priority. Yes, even higher than investing -- the "returns" on paying off a high-interest balance are almost always the best available, and unlike the returns from hot stocks, they're guaranteed.

Handling your credit is just one way to get your finances under control. Tune in as Fool contributor Dan Caplinger presents his five-day fix for your finances.

 

Fool contributor John Rosevear has no position in the companies mentioned. American Express is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2010, at 5:19 PM, 102971 wrote:

    One of the most diabolical things credit card companies have started doing is arbitrarily reducing credit limits. I am a business manager and one of my clients has had his credit limits reduced on three of his six cards to just $100 above their current balances. He has never been late with a payment and has never used more than 50% of his credit limit, therefore, his FICO score was very good. Now, however, his credit profile will show that he is using 99% of his credit limit on these three cards which will, undoubtedly affect his FICO score. These three cards were with Chase and Citibank so if you have any of their credit cards - BEWARE!

  • Report this Comment On February 22, 2010, at 5:55 PM, marcin97 wrote:

    For the past 16 years I had never paid any interest on any of the cards I owned. I started in college where my first CC had a $250 limit. Then my credit grew and I obtained more cards and at one point I had over $50k in potential credit limit. My portfolio included store cards as well. I've NEVER went over a limit, never paid interest fees unless there was a special offer like 0.9% for the life of the balance (good old days, with only $50 max transfer fee). Only once paid a late fee due to not sending a payment, it was sitting on the desk, my fault. I no longer send check, everything is autopay in full. So, over 16 years of credit building, I have now only one card from each major issuer and actually kept one card since college due to sentiment :-) In my opinion, if the government needs to bail you out with some credit act cause you can't manage your own finances, then you should NOT own a credit card!

  • Report this Comment On February 22, 2010, at 7:06 PM, PSU69 wrote:

    Credit cards provide a service and they deserve to make a reasonable profit. Those of us who travel the world need them to pay for hotels, events, tickets. My pals in England have been particularly abused by credit card companies. I strive to help my sons manage their credit carefully. One son is a saint and the other is "still learning." Help those you love to learn to avoid any credit cards that are NOT necessary.

  • Report this Comment On February 22, 2010, at 7:45 PM, TMFMarlowe wrote:

    This isn't a "bailout", this is just making the banks play by the rules they should have been playing by all along.

    Maybe you missed it, but the only "bailout" here went to the BANKS.

    John Rosevear

  • Report this Comment On February 22, 2010, at 8:20 PM, jomueller1 wrote:

    The credit card companies behave as they are supposed to: Maximise profits at the expense of their victims, aka customers. That's what they learned from Wild West history and the robber barons. According to the "conservatives" the market is the most efficient mechanism to satisfy all needs. I guess those theorists turn a blind eye to abuse.

    I suffered the same fate as written in the first comment. Suddenly I cannot refinance my home any more. Was that the plan to start with? Aren't the bonuses of the bankers already insane enough?

    My simple solution: I will get rid of all credit cards and the abuse by the credit card companies. Then I do not worry about their bonuses any more.

  • Report this Comment On February 22, 2010, at 8:43 PM, xetn wrote:

    jomueller1 What free market? There is no free market anywhere. You have been drinking the socialist kool-aide. All banking (including credit cards) are heavily regulated and now we have Obama's additions. I have no love of any banks or credit card companies; I just use them. But, I do not have any debt of any kind! That maintains my freedom. My point? vote with your money and your feet if you do not agree with any policy of any company or government.

  • Report this Comment On February 22, 2010, at 9:02 PM, simonhs wrote:

    I'm sorry if I offend anyone, but I'm sick of everyone complaining that banks and credit card companies are "tricking" consumers. Everyone should know to read the terms and conditions of any type of contract. You signed it, live with it! I actually heard someone say once: "It's not my fault, the bank kept upping my credit limit!" Come on! Just because the limit is there, the bank never forced you to use it. If you can't control your own spending, that's your problem. Everybody now has this mentality of buy now, pay later (or never). What happened to saving up to buy something? Anyways, just my 2 cents. :D

  • Report this Comment On February 23, 2010, at 12:46 AM, Aivlys31 wrote:

    I agree with simonhs. I grew up knowing that you don't spend what you don't have, and you don't spend everything you do have! Save and invest from every pay check using common sense. I have several credit cards and a high limit, but I never come anywhere close to that. The cards I use pay cash back, so all my monthly charges, cable, utility, phone etc are paid from those. One is a store & on line card so I never pay delivery or return charges.

    My credit card bills are paid in full every month. I can't be late or forget because all my bills are paid automatically from my checking account. I keep a careful watch on that balance. Sadly, for some people, common sense isn't very common.

  • Report this Comment On February 23, 2010, at 12:47 AM, anuvaka wrote:

    Do you like puzzles?

    The credit card companies do. It's a mater of time for them to come up with a way to make their cards more profitable, basically from collecting fees from you.

    Debt cards are not covered by this bill. It looks like the first puzzle is solved.

    Yes I have credit cards, one has a balance, the second gets paid online on the date of purchase. Others are unused, just backups.

    But there are always tiny fees, charges. I don't expect it to change.

    Personally I prefer cash.

  • Report this Comment On February 23, 2010, at 12:56 AM, anuvaka wrote:

    Do you like puzzles?

    The credit card companies do. It's a mater of time for them to come up with a way to make their cards more profitable, basically from collecting fees from you.

    Debt cards are not covered by this bill. It looks like the first puzzle is solved.

    Yes I have credit cards, one has a balance, the second gets paid online on the date of purchase. Others are unused, just backups.

    But there are always tiny fees, charges. I don't expect it to change.

    Personally I prefer cash.

  • Report this Comment On February 23, 2010, at 6:07 AM, xetn wrote:

    Try reading this for a different view of this subject:

    http://mises.org/daily/4058

  • Report this Comment On February 23, 2010, at 10:00 AM, dymty wrote:

    I agree w/marcin97 and simonhs: I never pay interest on a credit card because I never buy more than I can afford to pay for in one month. For the 'big ticket' items, seems I can always find a retailer willing to let me slide for six, twelve, eighteen months or more while accruing no interest and paying no fees. The only fees I did pay were on those balance transfer deals, but as simonhs said, one has to read the actual contract. There was always some catch, and I always avoided those cards that used dubious tactics to draw out their fees.

    Sad to say, but these new 'rules' seem to have been drawn up to help 'protect' the financially illiterate. It's not the CC's fault, rather it's our failure to educate people to the degree that they can make sound financial decisions. Make sure your kids understand the pitfalls of financial ignorance (but then again, you probably already have if you're reading Motley Fool).

  • Report this Comment On February 23, 2010, at 11:52 AM, LegalizeMe wrote:

    Debt is dumb, cash is king.

    The only people who have credit card problems are people who have no clue how to handle money. No rule changes will substitute mass amounts of stupidity.

  • Report this Comment On February 23, 2010, at 12:37 PM, switchingtoguns wrote:

    The fact that these reforms need to be implemented only serves to the socialist mindset that the average consumer is too ignorant or stupid to handle there own personal lives and thus big brother has to ride to the rescue and protect consumers. The culture of victimhood in the U.S. is really pathetic.

    Did we all not learn some lessons the hard way and figure out that if you get thumped once you don't do it again because hey that hurt. I once got zapped by B of A for 2 bounced checks (stupid mistake forgot to balance my checkbook a long time ago - 1999) and got hit with $60 in fees. Ridiculous? Absolutely. Did I learn and never bounce anymore checks? Oh yeah.

    I agree with those that state you signed the contract, now live with it. No one forces anyone to utilize a credit card or a checking account to make everyday purchases. dymty correctly states that there should be some education on these matters in school. I know I never received any schooling on this save how to write a personal check, thats it. Wonder if I would have forgone the Graphics class in 8th grade for a course on Equity Markets?

  • Report this Comment On February 24, 2010, at 4:22 AM, RCS2rocks wrote:

    It is very important for education of money matters to our youth. I do believe TMF has books to help with that. But in America it seems the youth keep repeating the sins of their parents. And most Americans keep retiring broke. On another matter, to respond to some of you previous commentators, I pray you never end up losing your job, losing your insurance with tens of thousands of dollars in medical bills. "Do not Judge lest you be judged. For in the way you judge, you will be judged...."

  • Report this Comment On February 24, 2010, at 6:16 AM, TMFMarlowe wrote:

    RCS2rocks, your response is dead-on. Those kinds of situations have happened to a lot of people in the last couple of years. Why some of these other folks are oblivious to that reality is beyond me.

    Thanks for reading.

    John Rosevear

  • Report this Comment On February 24, 2010, at 5:23 PM, Lorenzo107 wrote:

    Full disclosure, I am a conservative person by nature. I belong to no political party, I would be too embarrassed to be associated with any of them. I don't overspend. I don't buy things I can't pay for and I don't use leverage for investing.

    So, to all of you who spew bile at the CC cos, you are the reason big government exists. You are truly too stupid to manage your own affairs and need big daddy to care for you. You also want me to pay for your inability to care for your self. To you I say, p*ss off. We have shrugged, as in Atlas. We have taken our capital and retired to a remote region of the US to live out our days in peace, far from the cities and you whiners and snivelers. We devote our time to helping others less fortunate that want an opportunity, not a handout or free ride. You are a sad lot and deserve the loss of freedom who will receive for the cradle to grave "security" you crave so much. Enjoy and good luck!!

  • Report this Comment On February 25, 2010, at 4:33 PM, ziq wrote:

    All well and good that most of us here use credit responsibly, but there are enough who don't for it to be a huge cash cow for the banks. I certainly read everything I'm agreeing to before signing up but doing so is tedious and annoying, deliberately so. The CC companies are "banking" on plenty of customers who more than make up for our good credit practices.

    I'm no "socialist" but I think it's appropriate for banks to make a fair profit on their consumer lending while suffering a reasonable amount of regulation to prevent them from actively encouraging people to get in over their heads. I'm not saying debtors shouldn't be held responsible for their actions (no bailouts), just that encouraging destructive actions is immoral. You can't micro-manage morality, but the regulations mentioned in the article are sensible.

  • Report this Comment On February 25, 2010, at 4:42 PM, ziq wrote:

    All well and good that most of us here use credit responsibly, but there are enough who don't for it to be a huge cash cow for the banks. I certainly read everything I'm agreeing to before signing up but doing so is tedious and annoying, deliberately so. The CC companies are "banking" on plenty of customers who more than make up for our good credit practices.

    I'm no "socialist" but I think it's appropriate for banks to make a fair profit on their consumer lending while suffering a reasonable amount of regulation to prevent them from actively encouraging people to get in over their heads. I'm not saying debtors shouldn't be held responsible for their actions (no bailouts), just that encouraging destructive actions is immoral. You can't micro-manage morality, but the regulations mentioned in the article are sensible.

  • Report this Comment On February 26, 2010, at 10:29 PM, Foolishest100 wrote:

    Those who say they don't pay the CC issuers any interest are RONG. Even those of us who have autopay of each month's balance pay. The reason: about 2% of the price you pay is built into thst price by the merchant. It's a business expense that must be factored in to his pricing.

    Example: Each month you spend $100 with a merchant. He turns in your CC chit and receives $98 in return (approx., depending on his volume and CC contract). You pay the CC company $100. when billed, say 15 days later. So,over the year, the CC receives $24 for paying out $98 for 180 days-- $48 "interest" on "loaning" $98 for a year. That's about a 50% interest rate; not too shabby!

    Of course that's not all profit for the CC company. They have many expenses, including many unrecovered defaults. Merchants are victims of semi-extortion by the CCs: they MUST accept CCs in present day commerce. So they must recover their costby incresing their prices. So YOU pay.

  • Report this Comment On March 01, 2010, at 8:19 AM, mikecart1 wrote:

    Anyone with credit card debt, I consider stupid. I don't care what degree they have, what they have invented, or where they are in society. If you have credit card debt, you obviously don't know one of life basics - money management - and therefore you are by default stupid.

  • Report this Comment On March 01, 2010, at 9:16 AM, TMFMarlowe wrote:

    mikecart1: Why do I suspect you've never been unemployed?

    John Rosevear

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John Rosevear is the senior auto specialist for Fool.com. John has been writing about the auto business and investing for over 20 years, and for The Motley Fool since 2007.

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