Credit Card Companies Spike Interest Rates Before New Law Goes Into Effect

The law of unintended consequences: the Credit Card Trifecta -- lower limits, higher rates, higher minimum payments."

Credit card companies are raising interest rates and fees seven months before new rules go into effect that will limit their ability to do so, much to the irritation of Congress and consumer advocates.

Congress passed, and President Obama passed, a new law in May that would prevent credit card companies from raising interest rates on existing balances unless the borrower was 60 days or more past due. The new law also requires the original interest rate to be restored after a 6 month period of on-time payments.

While it's true that the credit card companies are engaged in practices that border on loan sharking, the facts are disclosed to the consumer ahead of time (though usually written in legalese and printed in 6pt type). However, there is ALWAYS the law of unintended consequences when Members of Congress (most of whom have never run a business or know very little about the economy) start meddling in private enterprise.

In Today's Economy, Saving Your Cash May Be Better Option Than Paying off Debt

USA Today has an article on how the current financial crisis is hitting segments of society normally not impacted during previous economic downturns. They call it "the perfect storm" because not only are we experiencing massive layoffs, but the stock market has lost around 40 percent and the largest asset most families own (their home) in now their greatest depreciating asset.

The experts cited say that many people caught in this perfect storm will never get out of debt and that at this point in the recession, it's better to cut back dramatically on your expenses and save for a rainy day, versus paying off debt. If you lose your income, you will quickly need to make decisions about how to allocate your savings.

For example, if you are less than 6 months late on a credit card bill, that's not a crisis. They have charged it off and you lose is your credit rating. This is not a catastrophe and if you have a good tool -- like The Credit Secrets Bible -- you can delete bad credit from your credit report.

However, if you are 6 months late on your mortgage, you have most likely received a notice of default and are about to lose your home. And if you are one month late on your car payment, you may be in jeopardy of losing your transportation to job interviews.

Credit Card Companies Are Cutting Credit Lines to BELOW What is Currently Owed

Have you had this happen to you yet? Your credit card company can cut your credit line to below what you owe -- without notice -- and charge you over-the-limit fees. And for now, this practice is perfectly legal (the federal law forcing lenders to give consumers 45 days notice before reducing credit lines doesn't go into effect until 2010).

Smart Money wrote about this practice in their March 11 edition. You can read it online here.

The motivation among issuers to make such deep cuts that they plunge below a cardholder's balance amount isn’t very clear. . . One possibility is that this is yet another attempt by card issuers to get consumers to close their accounts (while bringing in a little fee income in the short term), says Dennis Moroney, research director and senior analyst for consulting firm Tower Group. “I can’t rationalize in my mind what other motivation there would be,” he says.

Even cuts that are close to the balance have the potential to devastate if they’re not caught quickly. Luckily for Carol Gressett of Decatur, Miss., she noticed the reduction in her Discover-branded Sam’s Club card limit just days after it happened. The limit was cut to within $100 of her $3,000 balance. The official letter notifying her of the reduction arrived three weeks later. “We could easily have gone over if I hadn’t been paying attention,” she says.

While this practice may still be legal, it is unscrupulous. It can also lower your credit score. As consumers, we must do everything we can to protect ourselves, our money and our credit rating. If you use your credit card regularly, check your balances daily. If you haven't done so already, sign up for online access to view your credit balances. Finally, keeping your credit score above 720 and your total balances under 30 percent will reduce the chances of this happening to you. All of these techniques are outlined in The Credit Secrets Bible.

Load of Revolving Debt Especially Hard on Subprime Borrowers

Mortgage banks weren't the only ones dishing out easy credit to subprime borrowers. In an investigation conducted by USA Today, the consequences are clearly visible with foreclosures at record levels and credit card delinquencies nearing a six-year high as millions of borrowers struggle to keep up with a record load of revolving debt, mostly on credit cards.

What caused this crisis was credit card issuers were eager to extend too much credit, too quickly because of the "phantom equity" in people's homes.