How to improve your credit score

Lenders make well over $1 trillion in loans every year based in large part on credit scores developed by Fair Isaac Corp. , a firm based in San Jose, Calif., that attempts to quantify which borrowers are most likely to repay the money on time. Borrowers with higher FICO scores are generally eligible to get bigger loans at lower interest rates.

But turning a good score into a great one can win you an even lower interest rate, and save thousands—even tens of thousands—of dollars for borrowers who take out a mortgage, buy a new car and use credit cards, experts say. In addition, consumers with sterling credit often have their pick of lenders and can sometimes use that leverage to pay lower loan fees.

Tens of millions of Americans carry credit scores that are just under the highest range. Some 32.8 million people have FICO scores between 700 and 749, on a scale of 300 to 850, and another roughly 36.4 million people have scores between 750 and 799. About 38.6 million are in the 800-to-850 range. Roughly 1% of the people with FICO scores, or around 2 million individuals, have a perfect 850.

Most lenders consider people with FICO scores of at least 720 to be prime borrowers, and generally charge them interest rates that are low—but not the lowest available.

When the best deals kick in can vary by lender and type of loan. But the benefits can be substantial.

For example, home buyers with FICO scores between 700 and 759 could get an interest rate of 3.983% on average on a $400,000, 30-year fixed-rate mortgage with a 25% down payment, as of Jan. 6, according to Informa Research Services, a market-research company based in Calabasas, Calif.

Home buyers with FICO scores in the 760 to 850 range could get an interest rate of 3.821% on average under the same circumstances, which means they would pay $6,194 less in interest in the first 10 years and $13,366 less over the life of the loan. On “jumbo” mortgages, which are common in pricier real-estate markets, the savings could be greater.

Borrowers who want to boost their scores can take certain steps that will pay off within a month or two, and others that will raise their scores over many months or even years.

Here’s how to make your score stand out to lenders.

How FICO Scores Work
The first step is to understand how FICO scores are calculated—and the role your score plays in lending decisions.

Five factors go into a FICO score. The most important is your payment history, which accounts for 35% of the score. If you want a high score, the first piece of advice is the simplest: Pay your debts on time.

The second factor is the overall amount of money you owe—including how close you are to the limits on your credit cards—which accounts for 30% of the score.

Another 15% of the score depends on the extent of your credit history, which favors borrowers with a long track record, while 10% is determined by whether you have shown an ability to manage different types of credit. The remaining 10% depends on whether you have applied for credit recently.

The three main credit-reporting firms—Equifax, Experian and TransUnion—then plug the information they have in your credit reports into the score calculation. The information each firm has may differ, so your scores from the three firms may vary.

Cody Goebel, who is 51 years old and lives in Silver Spring, Md., says he found out in late December that his FICO scores were 795, 806 and 807 when he applied to refinance his mortgage.

“I just try to manage my finances carefully,” says Mr. Goebel, a financial-markets policy analyst. He maintains a variety of loans, including credit cards, mortgages and private student loans he has cosigned for his two sons. And he regularly checks his credit reports to make sure there are no errors or fraudulent accounts that have been opened in his name—a problem he encountered about a decade ago.

Checking scores is getting easier. FICO has reached deals with a growing number of lenders to show their customers whichever of the FICO scores the firms use in lending decisions, at no charge.

Later this month, for example, Citigroup will begin showing customers who have Citi-branded credit cards their FICO scores. Lenders who already provide the service include Discover Financial Services and Barclaycard, a unit of Barclays .

Consumers in such programs also can see brief descriptions of what is holding their score down. In some cases, they can see when their score went up or down.

It also is possible to get access to your FICO score by paying a fee. Experian began offering that service in December, and Equifax already does, as does FICO through its consumer website, myFICO.com.

Prices vary by company and can range from $14.95 to $21.95 a month, and often include related services. For example, Experian also lets customers run scenarios which show how their scores might change if they pay down credit-card debt or take other similar steps.

Several firms run ads saying that they sell or give consumers credit scores free. But many don’t provide FICO scores, instead offering ones that are rarely, if ever, used by lenders. The scores can be significantly different from their FICO score, which can catch consumers off guard when they apply for a loan and find out they aren’t as creditworthy as they thought they were.

Keep in mind that the FICO score isn’t the only factor lenders consider when deciding whether to offer you a loan or what interest rate to charge. The size of a down payment or the extent of your relationship with a lender also can play an important role. Many lenders also have their own proprietary credit scores.

A Quick Payoff
Two fast ways to boost your FICO score are to spend less on your credit cards and to pay off card balances. In some cases, those moves can help raise a borrower’s score within as little as a month, says Ethan Dornhelm, principal scientist at Fair Isaac, also known as FICO.

If you want a FICO score of 800 or above, you should aim for a “debt-to-limit ratio” of no more than 10%, says John Ulzheimer, president of consumer education at CreditSesame.com, a credit-management site, and a former FICO manager. For example, if your total spending limit on all credit cards is $50,000, try to use no more than $5,000 at any one time.

The FICO formula also penalizes individuals who have too many credit cards with balances, Mr. Ulzheimer says. Instead, consider using no more than two credit cards and choosing the ones with the highest spending limits, he says.

Paying your credit-card bill in full when the statement arrives isn’t good enough if you want to keep your debt-to-limit ratio low, as the balances on your credit reports at Equifax, Experian and TransUnion are based on the most recent month’s credit-card statements, Mr. Ulzheimer says.

One trick: Pay the lender soon after you use the credit card, well before the statement closing date. Online payments often are processed in one to three days.

“I’ve been putting all my purchases [when] possible on credit cards and paying them off every week,” says Andrew Colucci, 29, a doctor in Boston. “I’m paid weekly, so when there’s a direct deposit I just send the payment.”

Mr. Colucci says his FICO score, which was 791 last summer, helped him to refinance approximately $120,000 of federal student loans at fixed rates as high as 6.8% into a private student loan at a 2.63% variable interest rate with Darien Rowayton Bank in Darien, Conn., in August.

Know Your Limits
As for increasing your spending limits, pay attention to the pitches you receive from card issuers. More issuers have been telling existing cardholders they are eligible for increases in the past year or two, says Curtis Arnold, founder of CardRatings.com, a credit-card comparison website.

But if you want to boost your FICO score, don’t use that extra credit. Also ask the card company if it would make a formal request to check your credit report before approving the increase; that alone could lower your score, Mr. Ulzheimer says.

Beware of store credit cards, which tend to come with relatively low spending limits. Consider using charge cards, such as those issued by American Express , as their balances often aren’t included in the credit-card debt-to-limit ratio in certain FICO scores that lenders use, says Mr. Dornhelm of FICO. Most charge cards don’t have a spending limit, since cardholders must pay the bill in full each month.

Consumers can check how issuers report charge-card activity on their credit reports, which they can access free once every 12 months at AnnualCreditReport.com.

Lastly, try to use each credit card you have at least once a year, says Mr. Ulzheimer. Card issuers sometimes shut down unused cards, which can hurt your score.

Take the Long View
Other strategies can take months or years to boost your score, which is worth keeping in mind if you are planning to make a major purchase such as a house or a car down the road.

Building a credit history and demonstrating an ability to manage different types of debt—such as credit cards, car loans and mortgages—both take time.

The good news is that if you manage debt responsibly, your FICO score should increase and the benefit should endure for years. When borrowers successfully pay off car loans or mortgages, the information stays on their credit reports for 10 years from the date of the last payment, according to credit-reporting firms.

There is an important exception: If you miss payments or default on a loan, that information stays on your credit report for seven years. So if you encountered financial difficulties during the financial crisis, say, waiting a little bit longer before taking out a new loan could be worthwhile.

The impact of missed payments is usually worst in the first few years, but 96% of people with a FICO score of 785 or greater have no late payments on their credit reports, according to FICO.

Time your loan applications wisely, as well. Consumers should look for the lowest interest rates on mortgages, car loans and student loans. Shop quickly: Such credit inquiries aren’t factored into your FICO score within their first 30 days on file. They can affect the score after that period but are treated as one inquiry if they occur within a 45-day window.

If you take more time, the inquiries could count as multiple requests, which can lower your score, Mr. Ulzheimer says.

Inquiries can stay on your credit reports for 24 months, he says, though the FICO score factors in only inquiries up to 12 months old.

Take Advantage
Once you boost your FICO score, make the most of it. Some lenders don’t draw a distinction between a borrower with a score of 740 and a score in the 800s.

Find lenders that do. The payoff may come in the form of lower interest rates or lower fees. For borrowers who are seeking a $1 million mortgage with a 25% down payment and who have a FICO score in the 740 to 759 range, Salt Lake City-based Zions Bank, a unit of Zions Bancorp , has recently been charging an origination fee equal to 1.375% of the loan amount, or $13,750, and charging an interest rate of 3.625%, says Jeremy Lowry, a senior vice president at the bank.

Borrowers with a FICO score of 760 or more pay a 1% origination fee on the same loan.

Car buyers can benefit handsomely, as well. A car buyer with a FICO score of 730 would get an interest rate of 6.837% on average on a five-year loan to buy a new car, as of Jan. 6, according to Informa.

But borrowers with a FICO score of 800 could get such a loan with an interest rate of 3.24% at Birmingham, Ala.-based Regions Bank, according to Informa. That would result in $2,750 less interest on a loan of $27,799, the average amount for new-car loans in last year’s third quarter, according to Experian.

The larger the loan, the bigger the potential payoff. Cincinnati-based Fifth Third Bancorp , for example, sometimes offers lower interest rates to borrowers with FICO scores over 800 than to borrowers with FICO scores from 760 to 800 for jumbo mortgages—home loans that exceed $417,000 in most of the country, or $625,500 in pricier markets such as New York and San Francisco, according to Informa.

Federal Reserve Amends Credit-Card Rules on Income Requirements

(Bloomberg) -- The U.S. Federal Reserve approved a rule that would require credit-card issuers to consider consumers’ individual incomes before extending credit.

Credit-card applications generally can’t request “household income” because that term is too vague for issuers to evaluate whether customers will be able to make the required payments on the accounts, according to a statement from the Fed today. The rule is needed to prevent making credit available to consumers who lack the ability to pay, the Fed said.

The change is supposed to limit issuers from giving cards to college students, yet some lawmakers have been concerned that stay-at-home spouses will suffer.

“The proposed regulations ignore their demonstrated credit-worthiness because of their lack of current market income,” Representative Carolyn Maloney, a New York Democrat who sponsored the credit-card bill and Representative Louise Slaughter, a New York Democrat, said in a letter to the Fed in January.

Card issuers can allow spouses to apply jointly for credit, the Fed said.

The Fed also specified that promotional programs that waive interest charges for a specific period of time are subject to the same protections as reduced rate programs. Under this clarification, a card issuer that offers to waive interest charges for six months would be prohibited from revoking the waiver and charging interest unless the cardholder becomes more than 60 days delinquent.

Application Fees

Application fees that a consumer is required to pay are also covered by rules that apply to overall fees charged during the first year after the account is opened, the Fed said. Since the total amount of fees is capped at 25 percent of the initial credit limit, a card issuer that charges a $75 application fee with a $400 limit would be banned from charging more than $25 in additional fees during the first year after the account is opened.

President Barack Obama signed credit-card legislation in May 2009, describing its provisions as “common-sense reforms” that would “protect consumers.” The law was implemented in three stages, with the last of the rules taking effect Aug. 22, 2010.

Credit card hacker sentenced to 20 years in jail

Alberto Gonzalez has been jailed for 20 years for his role in stealing the details of millions of credit card users.

Alberto Gonzalez

The 28 year-old was found guilty on three counts of fraud after hacking into the computer systems of organisations including Heartland Payment Systems and 7-Eleven among many others.

Thefts perpetrated by the hacker, who was working as an informant for the US Secret Service when he carried out the crimes, were found to have cost banks and insurers up to $200 million.

Mr Gonzalez said: “I am guilty of these crimes ... I accept full responsibility for these actions.”

He received three 20-year sentences which will all run concurrently as a fine of $25,000 in addition to the jail term.

Up to $2.8 million is thought to have been amassed by the hacker, money which he spent on an apartment in Miami, a Tiffany ring for his partner and Rolex watches for friends and family.

He is also thought to have been drawing a $75,000 annual salary while working as an informant between 2003 and 2008.

The criminal’s accomplices, only known as Hacker One and Hacker Two, have not yet been caught by the authorities.

Capital One to Reimburse Customers for Fees

(Bloomberg) -- Capital One Financial Corp., the third-biggest issuer of Visa credit cards, will reimburse customers a total of $775,000 for charging annual credit-card membership fees after borrowers asked to close their accounts, regulators said today.

The McLean, Virginia-based company will pay customers who closed their accounts from 2004 to 2006 and were assessed membership fees on accounts with no outstanding balances, as part of an agreement with the Office of the Comptroller of the Currency, according to a press release from the OCC.

“This problem was the result of a systems issue that we fixed in 2006,” said Tatiana Stead, a spokeswoman for Capital One. “At the time, we refunded membership fees for many customers who contacted us directly but, in retrospect, we should have done so for an additional 3,400 customers.” Capital One said it couldn’t provide average fees paid by customers because they varied by product.

Capital One is going beyond the legal requirements and refunding membership fees for an additional 15,000 customers who paid their balances within 90 days of requesting their accounts be closed, Stead said.

The card issuer reported fourth-quarter net income of $376 million, or 83 cents a share, compared with a loss of $1.45 billion, or $3.74, in the year-earlier period. Capital One’s shares rose 48 cents, or 1.3 percent, to $37.33 at 4:15 p.m. in New York Stock Exchange composite trading.

Credit card new hidden fees

It appears credit card issuers are determined to maintain the high levels of profit they earn from charging fees. A new report released by the Center for Responsible Lending on Thursday shows that they have created or expanded at least eight hidden charges to replace the income they anticipate losing as a result of newly enacted federal legislation and Federal Reserve rules intended to stop credit card abuses.

For example, the report shows that credit card issuers have implemented a tactic it calls "pick-a-rate" -- and it's not the customer who gets to pick. Previously, consumers were charged an interest rate tied to what the prime rate was on last day of their 30-day billing cycle. Under the increasingly prevalent pick-a-rate system, the interest rate is based on the highest prime rate reported at any time during the previous 90-day period -- a practice that costs Americans $720 million a year and could grow to $2.5 billion annually as it spreads. Already, 117 million credit card accounts are being affected by this tactic.

The report also shows how issuers have shifted their penalty-fee structures so that now, nine out of 10 cardholders are charged the highest possible penalty for late payments, $39, even though the average overdue balance is $50. And there are several instances of issuers disguising or adding to miscellaneous fees that weren't covered by recent credit card reforms.

"The Credit CARD Act that Congress passed earlier this year was a big improvement for American families. But our research shows that [the credit card] industry keeps finding clever ways to get around meaningful reform," said Center for Responsible Lending researcher Josh Frank, the report's author. "We need a regulator focused on making financial products fair."

Many of these new fees are linked to clauses buried in the fine print of credit card agreements that issuers have changed since the enactment of the May 2009 Credit CARD Act, which goes into full effect in February 2010. Put simply, fees and charges will be triggered because credit card companies have quietly changed the rules and conditions under which they will impose them. The report estimates that the changes affect more than 400 million consumer accounts, but said most consumers will not be aware that they are being affected unless they read the fine print.

The eight major fee changes are:

Pick-a-Rate
Change in formula for calculating variable interest rates which results in rates that average 0.3% higher.

Variable Rate Floors
Variable interest rates can not go down from the starting rate for the account, but they can move up.

Minimum Finance Charges
Consumers with only a penny in charges get charged a minimum finance charge of up to $2.

Compression of Balance Categories in Tiered Late Fees
Issuers apply the highest late fee amounts to smaller balances, resulting in nine out of 10 consumers paying the highest fee.

Inactivity Fees
Issuers charge consumers for not using or closing their account, with fees as high as $36 a year.

International Transaction Fees
Issuers are increasing charges for transactions in foreign currencies, and expanding the definition of foreign transactions to include those in dollars.

Balance Transfer/Cash Advance Fees
Issuers are charging a fee for these transactions, and the amount of the fee (as a percentage of the total) is rising.

Balance Transfer/Cash Advance Fee Floors/Ceilings
Minimum cash advance and balance transfer fee amounts have increased, while maximum fee amounts have disappeared.

Radisson hit by credit card hack

Hotel Chain Radisson has been the subject of a computer attack that saw credit and debit card details stolen from its computer systems.

In an open letter on its website, the company said that the incident occurred between November 2008 and May 2009 at its branches in the US and Canada.

It is not known how many hotels were targeted during the security breach, but the firm stated that the number that may have been affected is "limited".

Data such as names, card numbers and expiration dates was taken during the hack attacks and Radisson has urged guests who stayed at its hotels during the time period to check their bank statements for any suspicious transactions.

"To the extent there is any suspected unauthorized card activity, it should be reported to the bank that issued your credit card, as well as proper law enforcement authorities," the company advised.

Last month, Network Solutions revealed that details relating to 573,000 debit and credit card accounts were stolen earlier this year during a hack on its web servers.

New credit card rules - how to reject an interest rate increase

Below is a letter you can use to opt-out of interest rate increases. Edit the bold words to fit your credit card information.

Date

Your Name
Your Address
Your City, State Zip

Credit Card Issuer
Address

City, State Zip

Re: Account Number XXXX-XXXX-XXXX-XXXX

To Whom It May Concern:

On January 15, 2009, I received a notice from you indicating an interest rate increase on the previously referenced account. Let this letter serve as my notification that I do not wish to pay the higher interest rate. I will continue paying my credit card balance at the current interest rate of 8.9%.

Please confirm in writing to the address listed above that I have been opted-out of the higher interest rate.

Thank you for your anticipated cooperation in this matter.

Sincerely,



Your Name

Tips for Sending Your Opt-Out Letter

• To be effective, your opt-out letter must be sent within 15 days of receiving notification of the rate increase or by the date listed on your rate increase notification.
• Even if you opt-out by phone, it's a good idea to follow up with a letter so that you have proof of opting-out if the credit card issuer misplaces your phone opt-out.
• Send your letter via certified mail with return receipt requested. Ideally, you should obtain a certified mailing label from the post office prior to printing your letter. That way you can include the 20-digit trakcing number on the certified mailing receipt number in your letter for extra proof.
• You can track the letter at USPS.com using the 20-digit tracking number on the certified mailing receipt. The return receipt will arrive in the mail a few days after the mail has actually been received.
• Follow up with the credit card issuer to be sure your opt-out was processed and to find out if and when your account will be closed.

New credit card rules

Starting Thursday 8/20/09, when the first phase of the new Credit Card Accountability, Responsibility and Disclosure (CARD) Act goes into effect, credit card users will be armed with a new right to say no to -- that is, opt out of -- interest-rate increases and other changes in their credit card agreements.

Under the first phase of the new law, consumers must be given:

• At least 45 days' warning of changes to their credit card accounts. Currently, only 15 days' notice is required unless customers default on their accounts, in which case interest-rate increases can go into effect immediately.

• At least 21 days to pay their monthly credit card statements without threat of late fees.

• The right to opt out of interest-rate and fee increases and the right to cancel their accounts while paying off the balances under the old, lower interest rates. Currently, issuers offer opt-out options at their discretion, and it is not a consumer right.

• Highest interest balances paid first:

  When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first.

  Current industry practice is to apply all amounts over the minimum monthly payments to the lowest-interest balances first -- thus extending the time it takes to pay off higher-interest rate balances.

Other aspects of the new credit card law -- such as restrictions on interest-rate increases, bans on issuing and marketing credit cards to young adults, and regulations on gift cards -- take effect in February 2010 and later. In addition, starting July 1, 2010, a host of requirements for disclosing fees, rates and terms on monthly statements, credit card applications and mailers will become law as a result of new rules drafted and approved by the Federal Reserve Board and other banking regulators.

More details on the new opt-out rules

Other provisions that got into effect Thursday include:

• Credit card issuers must inform card users of the right to cancel when they mail a 45-day notice of a change in terms. The notice must explain the steps cardholders can take to exercise their right to cancel, including a toll-free number to call and a deadline for opting out.

• Opting out means a consumer can no longer make purchases with the card. Instead, the old, lower interest rate or fee will be applied while the consumer repays the balance.

• There are exceptions to the opt-out rule. Consumers cannot opt out of increases in minimum-payment amounts.

• Another major exception is variable-rate credit cards, whose rates are tied to an index -- almost always the prime rate. When the Federal Reserve raises interest rates, it raises the prime rate. Those increases are passed on to variable-rate cardholders; no opt-out is allowed. In recent months, card issuers have reacted by switching consumers from fixed-rate cards to variable-rate cards.

• Consumers who are more than 60 days late making payments do not have the right to reject rate increases.

• Reductions in credit limits cannot be rejected by any cardholders.

• Issuers cannot demand payment in full of outstanding balances or charge monthly maintenance fees on closed accounts if consumers reject changes in terms.

Key Changes of the New Credit Card Rules

On May 22, 2009, President Barack Obama approved a series of rules that make major changes to practices within the credit card industry. Here is a list of the 10 key changes of the new credit card rules. Note: the rules listed won't take effect until February 22, 2010.

1. No interest rate increases for the first 12 months of your credit card.

You can enjoy your interest rate for at least the first year after opening your new account with two exceptions. First, your rate could increase in the first year if the creditor disclosed a rate increase when you opened the account. Second, if you don't make the minimum payment within 30 days of the due date you'll be subject to a penalty rate increase.

2. No interest rate increases on pre-existing balances.

If and when your interest rate does increase, the credit card issuer can't retroactively apply the increased rate to existing balances. Only purchases made after the increase goes into effect will be subject to the new interest rate.

3. Rate increases require 45-day advanced notice, even penalty rate increases.

Banks currently get 15 days to notify you of an interest rate increase and they don't have to notify you at all for penalty rate increases. The increased time for an advanced notice will give you more time to respond to an interest rate increase. Rules regarding interest rate increases take effect August 20, 2009.

4. No more double billing cycle finance charges.

The double billing cycle method of calculating finance charges allows credit card issuers to charge interest on balances you've already paid. The Federal Reserve has outlawed this expensive practice.

5. Limited fees for subprime credit cards.

Subprime credit cards can no longer charge up the cardholder's credit limit with fees. Now, fees are limited to 50% of the credit limit, but only 25% of those can be charged when the account is opened. The remaining fees must be spread over at least five billing cycles.

6. Billing statements must be sent 21 days before payment due date.

The current rule requires billing statements to be sent within a reasonable time for the consumer to make payment. The new rule puts a time period on that "reasonable time."

7. Payments received by 5:00 pm on the due date are on time.

The Federal Reserve recognizes that banks must have a cut-off time for accepting payments and sets that time to 5:00 pm. The didn't specify a time zone, so, sending your payment early is still a good practice.

8. Payments received the next business day after a weekend or holiday are on time.

If your due date falls on a weekend or holiday and your credit card issuer doesn't process payments on that day, your payment is still considered on time if it's received by the next business day. For example, that means the Monday after a weekend or December 26 during the holidays.

9. Payments above the minimum are applied to highest interest rate balances.

The minimum payment would go toward your low-rate balance, while the remainder of your payment must be applied to the balance with the highest interest rate. This reduces your interest cost over the life of the credit card versus the alternative of applying the complete payment to the low rate balance.

10. Billing statements must include year-to-date total of interest and fees.

Now, you'll be able to see just how much interest charges and fees you pay on your credit card. When the rules take effect, your billing statement will have to list the current month's interest charges and fees along with the total amount you paid during the year.

Credit card relief: Phase one

The first part of Obama's crackdown on the credit card industry will give consumers more notice when contracts are changed and the option to reject interest rate increases.

NEW YORK (CNNMoney.com) -- Consumers struggling with credit card debt will start to see some relief Thursday as the first steps of the Obama administration's industry overhaul go into effect.

Beginning Aug. 20, credit card issuers will be required to give customers 45 days advance notice before making any significant changes to a contract and will be required to mail bills 21 days before the due date.

Under current laws, issuers are required to give 30 days notice before changing a contract and mail bills at least 14 days in advance.

Consumers will also have the right to reject changes to their contracts, including interest rate increases, and they will have the option of paying off their balances at their existing rates within five years.

The changes are the first to come under the Obama administration's credit card reform act, which was singed into law in May.

"The new rules of the road established by the Credit CARD Act will shield credit cardholders from widespread abusive practices," Senate Banking Committee Chairman Chris Dodd, D-Conn., the bill's author, said in a Wednesday statement.

But the more substantial changes are expected in February, when the second half of the Act is implemented.

Thursday's reforms are "a good thing" for consumers, said Linda Sherry, director of national priorities at Consumer Action, a non-profit consumer advocacy group. "But they are just the icing on cake. The cake is coming in February."

In February, credit card companies will be prohibited from raising interest rates on existing balances unless the borrower is more than 60 days delinquent or the increase is stated in the contract.

"That's a very big deal for household budgets," said Gail Hillebrand, senior attorney at Consumers Union. "It means the rate can't go up on money they've already borrowed."

Among other measures to come in February: Consumers under the age of 21 will be required to have a cosigner and will have restricted credit limits; credit card issuers will not be able to raise interest rates in the first year unless specified in the contract; and issuers will be required to give more advance notice before raising rates on future purchases.

Thursday's changes. Requiring companies to mail bills seven more days in advance is expected to make it easier for consumers to pay their monthly installments on time and avoid penalties for being late.

But rejecting changes to the terms of a contract could come at a price.

While consumers will now have the right to reject an interest rate increase and cancel their cards, the new rules stipulate that the cardholder will have five years to repay their balance at the current interest rate.

That could result in a much higher minimum payment, since the time-frame to repay the debt will be condensed. Under the new rules, the minimum balance cannot go up by more than double.

In cases where the balance is too large to be repaid within five years without more than doubling the minimum payment, it's up to the credit card company to extend the time frame or determine a new rate.

Bank of America drops credit card arbitration process

Bank of America announced a policy under which an unhappy consumer can sue the bank over disputes regarding credit card and other loans. The move makes Bank of America the first major lender in the country to forgo the arbitration process for many consumer accounts. "It is certainly significant," said Alan Kaplinsky, a partner at Ballard Spahr Andrews & Ingersoll. "Whether others follow is an open question. Other banks and companies have used arbitration for years and are happy with it."

more at

http://www.reuters.com/article/ousiv/idUSTRE57D03E20090814

Protect yourself from a credit card backlash

The most sweeping credit card legislation in years is good news for cardholders -- but banks will respond by charging you more and giving you less. Here's what to do about it.

NEW YORK (Money) -- There's plenty to like about the credit card reforms President Obama signed into law this May.

For example, starting in February, your card company won't be able to raise the interest rate on an existing balance. Payments will be applied first to the portion of your balance with the highest rate. And if you miss a deadline for one card, the issuer of another can't hold it against you. All major victories for consumers.

But this doesn't mean you won't pay in other ways. Federal regulators recently estimated that the country's largest banks will suffer a total of $82 billion in credit card losses through 2010 as a result of the recession. And that has the institutions anxious to concoct new methods of creating revenue and limiting risk, says banking industry consultant Robert Hammer.

It also has them leaning heavily on some old standbys. After all, the law doesn't prevent banks from hiking rates on new purchases. Or zapping credit lines. Or yanking rewards. What's more, until the bulk of provisions go into effect this winter, the newly outlawed practices will still be in play.

Bottom line: You'll have to set your own rules, and not just rely on the government's. If you want to protect your plastic and all of its benefits, these six guidelines are a good place to start.

Don't: let your cards collect dust.

Chances are, you favor a particular card. But if you've got another idling in your wallet, now's the time to show it some love. To limit risk and expenses, "a lot of issuers are closing accounts because of inactivity," says John Ulzheimer of Credit.com. And they're doing so even to model cardholders.

Obviously, having a card canceled hampers your access to credit. But having less credit can also mean a lower credit score. Bad news all around.

To avoid this scenario, use each card at least once every three to six months. Just buy something small and pay it off. (Issuers will be placated by the fees they get from retailers when you swipe.) If you have more than two cards -- in reality, that's all you need -- rotate them, using only two in any given month.

Do: keep charging in check.

Not only are creditors canceling cards you don't use, they're also cutting limits on the ones you do. Banking analyst Meredith Whitney expects lenders to reduce available credit by $2.7 trillion through 2010, and a recent Credit.com survey concluded that 14% of Americans have already been victims.

Issuers have been targeting customers based on, among other things, location, spending pattern, and debt-to-credit ratio. This last one -- which refers to how much of your available credit you're using -- is easy to manage. You'll especially want to keep it in check to avoid a vicious cycle: A high ratio results in a lowered credit score, which also triggers credit line cuts.

"Ideally you'd use less than 10% of your limit," says Ulzheimer. That's stingy -- $500 on a $5,000 line. But you can safely creep up to 20% on any one card and in total unless you're applying for a loan soon and want as pristine a profile as possible. (In that case, zero out your cards and put them on ice for two months.) Don't go over the 20% line even if you pay in full every month. Issuers report the statement balance to the bureaus, so it looks as if you're utilizing that amount.

And if your limit is cut anyway? Banks haven't been receptive lately to consumers' requests for line reinstatements. So instead, open a new card (see the next point) to extend your available credit.

Don't: wait around for a rate hike.

About one in five consumers have recently seen the annual percentage rate (APR) on a card spike, according to Credit.com's June survey. Big banks -- hit hardest by losses -- have been especially eager to raise rates, says Curtis Arnold of CardRatings.com. You're likely to see them hurriedly hiking the APR on existing balances before February, and continuing to juice longtime cardholders on new purchases even after, he predicts.

So if you carry a balance and have a credit score of 730 or above, move your big-bank card into secondary status and rotate in a regional bank or credit union card, Arnold advises. Because such institutions use stricter underwriting standards, they offer lower rates and rarer hikes. The average major bank card is running 13.76%, says Arnold. But Arkansas-based IberiaBank FSB is offering a Visa Classic starting at 6.25% (800-980- 2265); NIH Federal Credit Union is advertising a Visa Platinum Rewards card at 8.9% (800-877-6440).

For more regional bank options, search CardRatings.com. For credit unions, use Bankrate.com's state-by-state list, then visit the unions' sites directly. (Most have lenient membership requirements, says Arnold.)

Do: force them to remind you.

With creditors expected to lose significant interest revenue as a result of the legislation, they'll have to increase penalty rates and fees, predicts bank advisory firm R.K. Hammer. Already in 2008 the average penalty APR was 26.87%, with some as high as 32.99%, per Consumer Action. And the average late charge at the 10 biggest banks was $39, R.K. Hammer reports.

Think you're too responsible to be late? Guess again. Issuers have been shrinking grace periods, and thereby shifting due dates by a few days, says Bill Hardekopf of LowCards.com.

To add insult, banks have been raising minimum-payment amounts, and sticking customers with fees when they underpay. Avoid the double whammy of fees plus penalty rates by setting up e-mail or text message alerts notifying you when your bill is due and what minimum is owed. (You can usually sign up on your issuer's website.) The alerts will keep up with account changes, even if you can't.

Do: reassess your rewards.

Issuers have been scaling back rewards for a while now; and industry insiders expect the trend to accelerate as companies try to cut costs. It's unlikely banks will pull the plug completely, given their need to lure new customers, says Emily Peters of Credit.com. But you can expect changes in accrual and redemption.

Discover, for example, recently reduced its cashback bonus so that cardholders earn just 0.25% on annual purchases up to $3,000 and 1% after that. (Previously, a middle tier between $1,500 and $3,000 paid 0.5%). Citi doubled the ThankYou points required to get some airline tickets, and moved up the expiration on other points.

The best way to protect your rewards? "Use them before you lose them," says Hardekopf. In other words, cash them out frequently. That's especially true of miles and points, which are getting harder to redeem anyway. In fact, you'll probably get better value with a cashback card that pays out frequently; the Schwab Invest First Visa (866-724-9223) returns 2% on all purchases and pays out every month.

Don't: miss changes that'll cost you.

As of this month, issuers must give you 45 days' notice before changing the rate or other terms on your card (vs. 15 days before). Since the new terms will likely be less wallet-friendly, it's crucial that you pay attention.

Problem is, there's no standard way issuers must notify you. So even the most vigilant cardholder can miss an important change. That said, the factors likely to have the biggest impact are credit limits and interest rates, and there's an easy way to keep up on these: Verify them on every statement. Your limit is usually near the top, and your rate is typically listed among the finance calculations. New law or no, it's still up to you to protect yourself.