5 Critical Credit Card Rules for 2011
Consumer money resource helps consumers remain card savvy even as providers loosen credit strings
SAN MATEO, CALIF. — Feb. 22, 2011 — Recent data shows that banks are increasingly willing to lend money, that the number of credit card offers is rising, and that overall credit card use by consumers has grown steadily over the past few months. Is this the return of easy credit?
"It certainly seems that we are returning to a time of easier credit," said Virginia Sullivan, VP of Consumer Education at consumer money resource Bills.com. "As credit restrictions ease, temptation and availability feed one another. Consumers must be extra disciplined to avoid falling into a familiar debt trap."
Credit card providers recognize that consumer confidence is rising and that consumers are increasingly willing to take on revolving debt. Despite recent changes in card regulation as part of the Credit CARD Act of 2009, there remain many opportunities for consumers to ensnare themselves or fall victim to high-interest rates and fees.
To help consumers navigate the dangers of easier credit, consumer money resource Bills.com today issued Five Critical Credit Card Rules for 2011.
1. Not all Cards (or Consumers) Are Created Equal
A common misconception is that the CARD Act capped interest rates. In fact, it capped increases, meaning new cards can be offered at any rate. There have recently been subprime cards offered at nearly 80% interest. As with a mortgage, only the best credit customers will have access to the lowest interest rates.
Poor credit consumers can help to build their credit scores through a disciplined credit card regime that involves using the card on planned purchases only and paying off the amount each month. This avoids high interest charges, establishes good credit card habits, and helps to build a better credit score.
2. A Little Bit of Cash is King
The new credit regulations allow merchants to set a minimum purchase amount for credit card transactions. This threshold cannot exceed $10 and does not apply to debit cards. Savvy consumers should always make sure they have a debit card or at least $10 in their wallet. It could save a lot of money over the course of the year in unnecessary purchases or charges.
3. Minimum Payments are a Last Resort
A typical minimum credit card payment is up to 4% of the total card balance. The negative impact of paying only the minimum each month is exponential.
For example, it would take 103 months and payments totaling $3,955 to eliminate an outstanding balance of $2,500 on a card with a 19% interest rate by paying only the required 4% minimum payments. By paying $100 a month instead of just the monthly, the same debt could be paid in 33 months at a total of $3,209. With a $150 payment each month, the debt would be retired in just 20 months at a total of $2,926.
For those in financial trouble, the impact of not making your monthly payments is even greater. Most cards will impose both a fee for a missed payment (capped at $25) plus a penalty rate. This can raise the cost of paying off a balance by hundreds of dollars. Paying at least your minimum required payment is crucial to maintaining good financial health.
4. Comparison Shop Until You Drop
Card providers continue to tinker with their card lineups to determine the ideal post-CARD Act mix. This means a wide range of fees, rewards, and transfer programs are available. Consumers will benefit from honestly assessing their spending habits and needs, then comparing that against an in-depth analysis of the type of cards available.
For example, those consumers who pay off their balances each month might not care about interest rates and should instead focus on low annual fees and generous rewards programs. The Bills.com Credit Card Resource can provide valuable assistance in researching available card options.
5. Use It or Lose It
Card providers have become more aggressive about limiting or cancelling unused lines of credit. In addition to limiting your access to credit, having a long-standing line of credit closed or reduced can also harm your credit score.
To keep your credit cards or current credit limits, you should use them on a regular basis — even if only for small purchases. Just be sure to pay off the balance each month to avoid interest charges. This will help you keep your cards and credit limits, avoid inactivity fees, and help boost your credit score.