If you have a credit card, you’ve received a notice outlining changes in some features of rules for using your credit card. And, for the most part, it’s good news.
So open the email or envelope and read your new credit card agreement. (It’s not so bad as the companies have tried to use more consumer friendly language).
We’ve highlighted some of the changes below as well as provided links to sites you might find helpful.
Whether you are working or retired, knowing the rules can help you manage your money better.
And, even with the changes, there are three basic rules that still apply to wise use of credit cards:
1. Pay on time. Whether you pay in full (preferable) or you pay the balance over time, a late payment or two gives the credit card company the opportunity to change the rules to its favor, not yours. Miss two payments – 60 days late paying the minimum – and the rate goes up. Know the rules of payment for your card and put reminders wherever you need to –sticky notes, Outlook reminders, mobile phone reminders – paying on time saves you money.
2. Pay more than the minimum – pay in full, if you can. Get into the habit of paying your credit card in full each month. New disclosures on your statement show you how long it takes to pay off your credit card balance if you are just paying the minimum – and how much it ultimately costs you. It’s good perspective next time you think about charging a deal that’s too good to pass up. The reality is that with interest charges the “great deal” turns into “more than full price.”
3. Nearing retirement – keep debt to a minimum. As you approach retirement, keeping debt to a minimum gives your finances (and you) more “room to breathe” each month. Using the credit card for convenience and paying it off each month – or for emergencies with a payback plan in mind – helps you keep you debt in line with your retirement income.
Here are highlights of the new credit card rules that go into effect Feb. 22:
* Raising rates on existing balances is now prohibited, unless you don’t pay on time. That doesn’t help you if you are already paying a high rate of interest. But going forward, you’ll know the rules and can make accurate calculations about what it will cost to pay off your debt.
* Credit cards can’t charge a fee for over-limit charges unless you tell them it is okay to do so (opt-in). Previously, people were hit with over-limit fees that could amount to hundreds of dollars as they used the card unknowingly exceeding their credit limit. If you don’t let the card company charge the fee, remember the charge will be declined. A good reason to be well below your credit limit in the first place.
* Your payment (anything above the minimum) gets paid against the highest interest rate balances first. Before, the banks would generally apply it to the lower rate balances. So this does automatically what you always want to do – pay off your highest rate balances first.
* You’ll find some new terms and disclosures on your statement. If you carry a balance, you’ll now know how long –and how much you’ll pay – to pay off that balance if you only pay the minimum. In the example provided by the Federal Reserve Board if you have a $3,000 balance, a 14.4% interest rate and pay the $90 minimum amount due it will take you 11 years to pay off the debt and it will cost you $4745. Pay $103 per month and it takes 3 years to pay off at a total of $3712.
* There will be fewer credit card offers on college campuses as the new rules require proof of income to issue a card to anyone under 21 years old. If you want your college student to have a card, it means you’ll need to co-sign. So make sure you both agree on the rules for use of the card, since card use now becomes part of your credit history.
Resources:
Here’s a helpful summary of the new rules for credit card companies from the Federal Reserve Board
5 Tips for the New Credit Card Era from CNBC
Credit card reform and your wallet – The Washington Post
What to Expect from the New Credit Card Rulesfrom SmartMoney