What credit card companies can and cannot do to your account

Credit cardsAlmost every day Wallet Pop gets questions about what may appear to be illegal actions by credit card companies. Unfortunately, in most cases the credit card companies can get away with closing your account, changing your interest rate, dropping your credit limit and changing your rewards programs, provided they give you proper notice. Bill Hardtop, CEO of Low Cards.com discussed by email some of the key questions people ask about current credit card company practices.

Whether or not a company can make changes in your credit card account depends on the fine print that you probably never read in the terms and conditions. They can make changes to these terms at any time as long as they notify you. Most times changes are mailed as an insert in the monthly bill. Sometimes, you'll get a special mailing. When you get something in fine print from a credit card company don't just toss it. Read it and call the company if you need explanations about what you are being told about possible changes to your account.Here are some key things that can be changed with proper notice

Can they change my fixed rate to a variable rate?

Yes. The issuer can switch the rate from a fixed to a variable rate even if the original offer said the rate was fixed for the life of the balance. "Some issuers recently angered their cardholders by switching cards from fixed to variable rates. Some cardholders signed up for a card based on the fixed rate for the life of the balance," Hardekopf wrote. "They discovered that this was conditional. Issuers probably changed this because the Credit CARD Act requires that interest rates on new accounts must remain fixed for a year unless the cardholder does not pay the bill. Issuers don't want to be locked into that fixed rate, so they switched the cards from fixed to variable to give themselves more freedom in raising rates, even after the regulations go into effect."

Can they change my rewards program?

Yes. Some issuers are changing the rewards structure for some cards to cut costs. American Express reduced the amount of cash you can earn from 1.5% to 1.25% on most purchases. Chase created Ultimate Rewards with a less-generous rewards program to replace its popular Chase Freedom card. Capital One has notified some cardholders of a new points program that starts in November that has slightly lower rewards on a number of tiers.

Can they close my account?

Yes. Issuers are closing accounts as a way to reduce their own lending risk. Unlike rate increases, issuers do not have to notify you before they close your account. Some issuers state in their terms and conditions that they will not be responsible for the consequences from closing your account. "Some issuers are closing accounts due to inactivity. Right now, credit lines are very important, even if you aren't using them. They can be good for your credit score. To show account activity, use your card once a month on a small purchase and then pay off the balance completely at the end of each month," wrote Hardekopf.

Can they increase my minimum payment?

Yes. Chase recently increased the minimum payment from 2% to 5% for many of its cardholders. In the long run, this is good for cardholders because the more they pay toward their balance, the faster they pay off the card and the less they pay in interest. However, this is bad timing and a financial blow for many households who are struggling to pay the bills right now. "If the increased minimum fee pushes you over the financial cliff, contact your issuer to work out a payment plan," says Hardekopf.

Can they cut my credit limit?

Yes. A recent FICO study says that credit card issuers cut limits for an estimated 58 million cardholders for the twelve months ended in April 2009. Issuers can also increase or cancel your credit line, or the balance transfer or cash advance portion of your credit line.

Can they increase fees any higher?

Yes. Issuers will probably continue finding ways to increase rates and fees. In June, Bank of America recently increased the balance transfer fee from 3% to 4%. Chase followed in August with an increase in the balance transfer fee to 5%.

Can they increase my rate because I defaulted on another credit card with another issuer?

No. This is Universal Default and it is banned under the Credit CARD Act. Issuers must only focus on your payment record with their particular card.

Can they force me to accept a higher interest rate?

Not any more. The CARD Act now requires issuers to give a 45-day notice before a rate increase. This gives cardholders time to opt out, and close the account at the current rate. Keep in mind that this forfeits rewards and points, so use those before you close the account.

Can they force me to keep paying the higher rate as long as possible?

Yes, but only for a few more months. Currently, many issuers apply payments to the part of your balance with the lowest interest rates, forcing you to pay the highest rate as long as possible. After the CARD Act goes into effect, they will apply the payment toward that part of the balance with the highest rates.

Can I do anything about significant changes to my account, especially the interest rate increases or decreases to my credit limit?

Unfortunately, unless you have a great credit score, there is not a lot you can do. Several years ago, competition for cardholders was so active that a cardholder had to simply mention a competing offer to negotiate a lower rate. Today, issuers are much more selective and focused on minimizing their own risk. Only the cardholders with excellent credit scores still have power to get a better deal by threatening to switch to another credit card.
Today, if your credit is not excellent, you may be stuck with the changes made to your account. Other issuers are no longer lining up with lower rates and generous terms for balance transfers just to get their card into your wallet or purse.

"Cardholders are angry about these changes and are getting very little relief from the issuers. Right now, issuers are focused on the bottom line, cleaning up their loans and saving their business. They are less sensitive to the concerns of their cardholders than they were a couple years go," wrote Hardekopf. "The only way to have control of your credit card is to pay off your balance every month. If you don't carry a balance, a change in the interest rate doesn't have much of an impact on you."

That's good advice. Some people are changing to debit cards and focusing on paying down credit cards. For those of you have trouble paying off your cards, the good news is that many credit card companies are offering modifications to terms that can include lowering your interest rate and possibly even forgiving part of your balance

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score.
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