Are Americans finally getting the message about credit
It looks like they might be, although it took one heck of a
recession to do it. A report released last week by the Federal
Reserve said that consumer credit card use fell again in July --
month in a row
. Since August 2008, in other words, which is when the extent of
the financial crisis really started to become clear to mainstream
While this trend isn't being hailed universally as good news --
less credit card use means less consumer spending, which means a
slower economic recovery, or so the argument goes -- I for one am
glad to see it.
Because despite recent reforms, credit cards are bad news.
Reform? Sort of
When the first part of the Credit Card Reform Act went into effect
last February, it seemed like a pretty good thing. The new rules
curbed the most egregious of the big banks' abuses, like
retroactive rate increases, targeting college students dependent on
their parents, and playing games with due dates in order to harvest
extra late fees. While I
predicted at the time
that the banks would find new fee-harvesting stunts to pull, taking
these shenanigans off the table was a definite improvement.
The rest of the act came into effect in August, and it was
largely about fees: Penalty fees can't be larger than the amount in
question (no more $30 fees for being late with a $15 payment or $10
over your limit, in other words); most penalty fees are limited to
$25 (though they can be raised for repeat infractions); "inactivity
fees" are no longer allowed; and interest rate increases have to be
explained to you and re-evaluated every six months.
None of this is bad. But if you think it means the banks are
going to play fair, think again.
Old dogs, new tricks
Already, reports are surfacing of new ways to add fees and restrict
"Rewards" with a catch:
) products for prominently advertising 5% "cash back rewards" --
but hiding the rather large list of qualifiers, exceptions, and
conditions in fine print. Long story short, you'll get that 5%,
but only sometimes, only on some kinds of purchases, and only if
you remember to sign up.
"Upgrades" that aren't: Citigroup
) recently told customers holding a 2% rewards card that they
would be "upgraded" to a new card with a fancier name -- and
conditions making those rewards harder to collect. As with the
Discover and Chase accounts, the categories eligible for rewards
change regularly, and you have to re-register
to collect them.
Hidden balance transfer fees:
Issuers love to promote their cards with "0% introductory
balance" deals, but increasingly these 0% promotions
apply to balance transfers. And even if they do, you may end up
paying a sizable fee on the transferred balance. It could be as
much as 5% in some cases, and the industry trend is (surprise!)
toward higher fees. That trend isn't limited to balance
transfers, by the way; say "welcome back" to annual card fees and
expect card interest rates to rise even as bank and bond rates
stay near historic lows.
The only way to win is not to play
As my fellow Fool Dan Caplinger
, "When you put your finances in the hands of profit-seeking
companies, even the government can't save you from your own
excesses." That's exactly right: The big issuers have historically
money from credit cards, and they will continue to search for ways
to preserve those revenue streams. And those ways won't typically
work to your advantage.
Sure, some banks will look to make up lost ground in other ways.
) , for instance, recently acquired 20 million new accounts via a
store card deal with
) . But by and large, all-purpose cards within the
) networks are where most of the action is, and the banks are
expecting to take that revenue out of your pockets, just as they
have in the past.
Your best defense, as always, is a good offense. Make it a
priority to pay down any existing balances, and then save the
credit cards for when you really need them. Credit cards certainly
have their place; in an era when many folks no longer have
significant home equity, a card can provide a valuable credit line
in a crisis. But always keep this in mind: Credit card companies
your allies, and if you decide to play their crazy games, you can't
Ready to get rid of that credit card hangover? Dayana Yochim
knows how to
boost your credit score in months
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