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5 Unintended Consequences of Credit Card Reform

by Barbara Marquand

The Credit CARD Act eliminated some of the credit card industry's worst practices for consumers, such as arbitrary rate increases and double-cycle billing.

But the new credit card regulations, effective February 22, have already created some unintended consequences. Watch out for these five credit card trends:

1. Tightened Credit

With the inability to raise interest rates arbitrarily, credit card companies are getting pickier about who they approve for credit. Customers with poor to mediocre credit may be shut out of the market. If you've had some credit problems, pay down debt and pay your bills on time to improve your credit score.

2. Higher Credit Card Rates Overall

In anticipation of the new regulations, credit card companies scrambled to increase rates on many existing accounts in 2009, and were offering higher rates on new accounts at the beginning of 2010. According to IndexCreditCard.com's monthly survey released in February, the average credit card rate offered to new customers was 16.7 percent, a half-point higher than the previous month and the highest average calculated since the survey's inception five years ago.

3. More Variable Credit Card Rates

The industry is moving toward variable, instead of fixed rates. Variable rates move up and down according to an index, such as the prime rate. With the prime rate at historically low levels, you can count on variable rates going up.

4. New and Higher Credit Card Fees

With their income limited by restrictions on rate increases, credit card companies are looking to make more money from fees. Some credit card companies are testing incentive programs to encourage customers to upgrade to cards with annual fees, and some companies have started charging inactivity fees on unused accounts, transaction fees on purchases made outside the U.S., or processing fees for paper, versus online statements. Card issuers are also increasing fees for services, such as balance transfer transactions.

5. Tougher to Get Credit Card Rewards

Credit card companies are becoming sticklers about reward redemption. American Express customers, for instance, learned they can't redeem credit card rewards if they're late with a payment, unless they pay a $29 fee.

The lesson in these trends is that even with reform, consumers still need to be wary. Read your credit card agreement thoroughly to avoid any traps, and shop carefully for the best credit card deals.

Published 08/29/10 (Modified 07/09/14)


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