Make it your business to learn new credit card rules
By Michelle Singletary
WASHINGTON — "Credit card debt, does it ever end?"
That's a haunting line delivered by comedian Amy Poehler in a 2006 "Saturday Night Live" skit also featuring Steve Martin and Chris Parnell. The sketch was brilliantly and simply titled "Don't Buy Stuff You Cannot Afford." (You can view it on www.Hulu.com).
So here we are in 2010, contending with a new law that assists many cardholders now that they've used money from lenders who imposed policies that helped keep them in debt for stuff they couldn't afford.
The second phase of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act) that put into place a number of consumer protections has now gone into effect. Many people have questions about the new provisions. Here are answers to some I've received from cardholders.
One reader asked: "Can banks still charge over-limit fees if you go over your limit because of monthly interest charges on your account?"
First, the Federal Reserve has created a new interactive Web site (www.federalreserve.gov/creditcard) to help cardholders understand the new credit card protections. On the site you will find a summary of the main provisions of the new law.
One of the best features of the over-limit provision is that companies can no longer push you over with fees or interest charges. Over-limit charges can be assessed only when a transaction or extension of credit, rather than a fee or interest charge, causes you to exceed your limit. You should also know that issuers are prohibited from conditioning the amount of available credit on the consumer's consent to the payment of over-limit transactions.
Issuers also can't charge interest on the fees themselves — for example, for being over the limit or late.
Most of the questions I'm getting are from people who aren't happy about changes to their credit cards because of the new law, and now they want to kick their card and issuer to the curb. However, they are worried about the almighty credit score.
Another reader asked: "If I choose to opt out by closing an account that has a balance, and continue to pay down the balance under the current term, will that have a negative impact on my credit score?"
In some cases, closing an account can have a negative impact on your credit scores. For others, there are little or no repercussions.
The key to which group you fall in is how much of your available credit you're using on each of your credit cards. You need to calculate your credit utilization rate. What percentages of your credit line are you using? This will help you decide whether to close the account.
What most affects your score when an account is closed is the presence of outstanding balances on other open accounts — not the closure of the account in itself. The scoring system looks at how much credit you are using compared with how much you have available.
If you have a large outstanding balance relative to your limit, then canceling a card could decrease your score. However, if you have multiple credit card accounts, all with zero balances, you could close one or more if you aren't happy with the new terms.
Closing a credit card account won't affect the duration of your credit history. Credit bureaus keep records of closed accounts in consumer credit files for years (seven years for negative information, longer for positive information). A closed account will continue to appear on your credit report where it is accessible for the calculation of FICO scores. The FICO score, the one most lenders use, considers both open and closed accounts when calculating length of credit history.
If you have more questions about the CARD Act, send them to me at colorof email@example.com.
If you own and use a credit card, make it your business to know at least the basics of the new law. If you won't take the time to know what's in the law, I want you to pull out your credit card or cards right now.
Get a pair of scissors.
Now cut up every single card.
I'm not saying you need to close the accounts just yet, but stop using the cards. Otherwise, you'll just be racking up debt that never ends.