The CARD Act - Cut the card, or cut back?

New credit card act detailsLast week, Citibank began issuing letters informing some cardholders that as of April 1, 2010, a $60 annual fee will be applied to accounts. The company didn't return my call for comment, but it has widely been reported that accounts were selected based on customer history and payment performance, not type of credit card. In other words, if you're not a profitable customer – you don't use your card very often – they're trying to turn you into one.

Consider this strike one. For months, we've been speculating that as a result of the CARD Act which, effective today, issues new credit card rules that restrict card companies from raising interest rates on pre-existing balances, issuers will start bringing back the annual fee. There's little doubt in my mind that other issuers will pile on (much like American Airlines has followed Jet Blue into the business of charging for pillows and blankets). Bill Hardekopf, founder of, agrees.

"The credit card industry is so competitive, and controlled by a fairly small number of companies. If one does something, the others all watch, and if it is successful, you can bet they jump on it. Whether they'll all jump on something like this, I don't know, but we do know that more cards are being introduced with an annual fee and more existing cards are being assessed an annual fee."

So what does that mean for consumers? And should you cancel your card if you get a fee notice in the mail? Here are a few questions that will help you make that decision.

Will you actually have to pay the fee?

In the case of Citibank, the $60 fee will be refunded if customers charge at least $2400 a year on their cards. If that's an easy mark for you to hit – or you trust yourself to put a few things on your card that you'd normally pay for in cash, and pay the bill in full at the end of the month – then you have nothing to worry about. But if this is a little-used card and you think increasing your activity will also add to the amount you pay in interest, you need to ready yourself to cancel or swallow the fee.

Can you handle a ding on your credit score?

In general, I advise not canceling cards because doing so will take your credit score down a bit. You reduce the amount of credit you have available which hurts the credit utilization piece of your score (it counts for about 30 percent) and shortens your credit history (which counts for about 15). The issue becomes more important, says John Ulzheimer, a credit expert for, if you have a high credit limit on the card you're considering canceling and you carry a large balance elsewhere. In a situation like this, not only are you greatly reducing the credit you have available, but you're bringing that limit closer to the amount of debt you're carrying. And it's most important in the six to 12 months before you apply for a large loan like an auto loan or a mortgage.

Will you face an administrative hassle?

If you have auto-billing tied to this card and will have to shift a large number bills so you don't default, that's something to consider.

Can you cut back in your budget elsewhere?
Can you cut back groceries, your weekend bar tab, premium cable channels you don't watch – to make up for the hit of the annual fee? If that's an easy thing to do, perhaps the annual fee isn't large enough to worry about.

My advice? Sit tight, for now, and see what happens. If this is a trend, you may very well end up canceling your card, switching to another one, only to be hit with an annual fee from that card. And if you do switch, make sure you apply for -- and receive -- the new card before you get rid of the old one. Just in case.

. Check out Jean's book Money 911 and her blog at, as well as The Debt Diet Online.
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