Due to the recent state of our economy, many people have been confronted with an unpredictable loss of income as companies are forced to restructure their workforce. Layoffs, downsizing and foreclosure seem to be constantly in the news. Companies are also cutting back on overtime, which can cause a profound reduction in income while salaried individuals are asked to take on more tasks and work more hours. It is wise to start thinking about “what if” alternatives and plan for possible unemployment, a reduction in pay, loss of overtime or a potential pay freeze. If you are married you should have a plan if either of you becomes unemployed.

Following are some tips to help you prepare if you think you may be facing a pay cut or reduction in income.

• The most important item on your agenda should be an updated budget.  If you are like most consumers, your monthly income never goes far enough. After paying for the house and groceries, it seems there is little leftover for things that matter most. The reality is it may not be your salary that is to blame; it might be a pattern of poor spending choices.
• It has long been recommended that people set aside the equivalent of three to six months of income to carry them through a crisis. Review your current monthly expenditures i.e. food, gas, needs, mortgage, auto loans/leases, insurance, etc. and reconfirm that your savings can sustain you for this period of time. If not, you must put aside extra funds from your current cash flow to build up your savings.
• Plan to pay off any 401(k) loans that are outstanding. If you lose your job you will be required to pay back any 401(k) loans rather quickly, possibly within just a few weeks. If you do not repay these loans, the government considers these funds an early withdrawal and will require you to pay taxes and penalties on the funds.
• Review employment benefits, including medical, dental coverage and life insurance. Take care of necessary annual checkups and examinations while you’re still covered. Married couples who are both employed should look into moving the entire family to one spouse’s plan. You may be able to reduce your expenses by reevaluating telephone plans, eliminating a cell phone, or eliminating a home maintenance service. Any of these funds could be deposited into your savings account.

DMCC offers free budget counseling sessions for anyone who is interested in getting their finances organized; even if you are not facing a reduction in income or unemployment. Establishing a budget is the first and most important step when confronted with an income reduction.  This is a necessary tool in formulating a strategy to stay ahead of your finances.

Our certified credit counselors will help figure out what you can do to maximize your income and put some funds away for savings.  DMCC can also help you answer questions that you may be facing about repaying your debts on a lower income.

Jessica Stokes is the Education and Research Coordinator at Debt Management Credit Counseling Corp. (DMCC) a 501 (c)(3) nonprofit charity committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt. DMCC is approved by HUD to offer housing counseling and by the U.S. Department of Justice to provide bankruptcy counseling and education. DMCC is located at 700 W. Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441. To speak to a certified credit counselor, call 866-618-DEBT (3328), email contact@dmcconline.org or visit www.dmcconline.org.

If you are struggling to pay your credit cards or other unsecured debts each month and you simply to do not have sufficient income to balance your budget, there are three primary options that may provide you the relief you need.

Debt Management Plans (DMPs)

DMPs are offered by your creditors through authorized credit counseling agencies and are designed to help you payoff your credit cards and other unsecured debt in full within 5 years. Benefits generally include reduced interest rates, one lower consolidated monthly payment, and no more collection calls or past due fees. Some creditors will also re-age your past due accounts and report them to the credit bureaus as current. Credit counseling agencies offering DMPs are highly regulated, insured and bonded. Fees typically consist of an initial setup fee not exceeding $75 and recurring monthly fees based on your amount of debt not exceeding $50.

Debt Settlement Plans (DSPs)

If you cannot afford the payment required by a DMP, another alternative to bankruptcy is a debt settlement plan. A DSP provides you relief when your creditors agree to accept payments for less than you owe in full settlement of your debts. However, your creditors will only accept settlements if they believe you are unable to repay the full balance. Under a DSP you stop making any payments to your creditors and instead, save the specified plan amount each month in a bank account until there are sufficient funds to make acceptable settlement payments. It is important to understand that DSPs are not endorsed by most creditors and during the time they are not getting paid, they will increase their efforts to collect from you. DSPs are primarily offered by attorneys and for-profit companies. Fee rates are generally not regulated, and typically consist of recurring monthly fees plus settlement fees at the time each debt is settled.

Bankruptcy

If filing for bankruptcy protection from your creditors is your best option, there are two types of filings that are available to most consumers; Chapter 7, which will discharge most of your unsecured debts in full, and Chapter 13, which will provide you a plan for the partial repayment of your debts. The Chapter under which you are qualified to file is determined by specified tests. Consumers filing bankruptcy are required to receive credit counseling from an approved provider prior to filing and complete a personal financial management course after filing. Although not required, most consumers use attorneys to file bankruptcy. Fees typically average $1,700 for singles filing Chapter 7 and $3,500 for Chapter 13, plus court costs.

Phil Heinemann is the Executive Director at Debt Management Credit Counseling Corp. (DMCC) a 501 (c)(3) nonprofit charity committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt. DMCC is approved by HUD to offer housing counseling and by the U.S. Department of Justice to provide bankruptcy counseling and education. DMCC is located at 700 W. Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441. To speak to a certified credit counselor, call 866-618-DEBT (3328), email contact@dmcconline.org or visit www.dmcconline.org.

Step 1: Open a browser and go to www.annualcreditreport.com.

Step 2: Select your state using the drop down menu and click “Request Report”.

Step 3: Complete the online form and click “Continue”.

Step 4: Click on the check box next to TransUnion (you may also choose Experian or Equifax, but their reports do not include full account numbers).

Note: You are entitled to one free credit report per credit reporting company per year. That means you may go back and get reports from the other two credit bureaus at any time during the year.

Step 5: You will be transferred to the credit reporting company’s site where you have to create an account.

Step 6: The credit reporting company will need to confirm that you are who you say you are. It will ask you questions related to your account numbers, address history, or employer history.

Note: You typically will only have to answer one open ended question like “Of the four following cities, type the name of a company that you worked that was based in one.”

Step 7: In addition to your free credit report, you will be offered to see your credit score for a small fee (under $10). Click “No Thanks” to see just the free credit report.

Step 8: Your free credit report now appears. Print it out or save it to a file on your computer.

Note: If you disagree with any part of it, there is a link for you to learn about how to correct inaccuracies.

Step 9: Click “Logout” when finished.

STEPS TO OBTAIN FREE CREDIT REPORT THROUGH THE MAIL OR PHONE

If you would like to obtain your credit reports by U.S. P.S. you must go to www.annualcreditreport.com and download the request form. Print and complete the form. Mail the requested information to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

Your reports will be mailed to you within 15 days. Please allow 2-3 weeks for delivery.

To request your credit report by phone call 1.877.322.8228. You will go through a simple verification process over the phone.

After being enrolled in DMCC’s Debt Management Program (DMP), you qualify for a Credit Score Analysis.

What is a Credit Score Analysis?

Your credit score is a direct result of what is listed on your credit reports. Therefore, changes to your reports, could have positive or negative consequences. DMCC has the ability to simulate changes to your reports. After 6 months on our DMP, DMCC will show you what you need to do to improve your score. Contact DMCC and learn how you could get a free analysis.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.

1. You do not have any savings.

2. You make minimum payments on your credit cards.

3. You use credit cards for things you used to buy with cash, such as groceries.

4. You use increasing amounts of your total income to pay off debts.

5. You have more than two or three major credit cards.

6. After you pay your credit card bill, you increase your balance by the same amount (or more) the following month.

7. You are at or near your credit limit on your credit cards.

8. You count on the float in order to pay your bills, writing a check hoping that you’ll be able to cover it by the time it clears your bank.

9. You are unsure of the total amount you owe on all your debts.

10. You take out cash advances on your credit card to pay other bills.

11. You have tried to make a purchase with your credit card and been declined.

12. You have been denied credit.

13. You bounce checks.

14. You get calls from collectors.

15. You lie to your spouse or other family member about your spending, hide credit card statements or constantly argue with family members about your finances.

If you realize that you are in over your head, the sooner you act, the easier it will be to get out from under the burden of debt. Beware of companies that promise to fix your credit. There is no easy fix, but it is possible to turn your finances around if you work at it.

Here are some other warning signs that you might be piling up too much debt:

• You cannot pay off the bill in full each month. Even before you get to the stage where you’re only paying the minimum, there are warning signs. If you rarely see your credit card balance drop to zero, you need to start rethinking your spending/saving plan.

• You are charging because you haven’t got the money. If you are making purchases with your credit card because you can’t afford to pay cash for it, that’s a strong sign you are in financial trouble.

• You are near or at the limit with your credit cards. You have spent yourself into a corner, and the credit you need for everyday life is used up.

• You are suffering physically. Your brain is recognizing that your spending patterns are in conflict with your income and your anxiety level increases.

• You are running up unsecured lines of credit. Many institutions offer lines of credit or overdraft protection on checking or savings accounts. If you are utilizing these services on your accounts month to month, then you have a problem. Because these services usually have a cost associated with them, they can be costly every time they are used.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.

Budgeting and Self-help

In many cases, consumers can actually get out of debt on their own. It takes planning, hard work and dedication.

The first thing you need to do is design a realistic, workable spending plan. Debt Management Credit Counseling Corp. can help you design your budget with our free budget analysis. A certified financial counselor will help you analyze your income and expenditures to see where you can cut your expenses in order to get out of debt. This service is absolutely free. Please contact DMCC at 1-866-618-DEBT to speak to a member of our staff.

Debt Consolidation and Debt Management Plans

In the past couple of years, there has been a lot of talk about debt consolidation and what it can really do for indebted consumers. A debt consolidation company usually receives payments from a debtor and distributes the funds to the various creditors. This way the debtor only has to write one check a month, but still satisfies all of his creditors. DMCC offers a debt management plan (DMP) that combines debt consolidation of unsecured debt with reduced interest rates, lower monthly payments, and the elimination of fees from your creditors. Our certified financial counselors will assist you in designing a debt management plan that fits your specific situation. DMCC also offers a variety of free educational information and a financial literacy program that will help you gain the skills you need to make smart financial decisions. Please contact DMCC at 1-866-618-DEBT to find out how our program can help you get out of debt.Debt Consolidation Loans

 With a debt consolidation loan, a lender will give you a loan for an amount that will pay for all of your unsecured debt. The loan may or may not have a lower interest rate than what you were paying to all of your individual creditors. Although DMCC does not offer debt consolidation loans, we can help you find the right way to get out of debt. DMCC works with several mortgage lenders with special programs for consumers enrolled in a DMP for a minimum period of time. If our DMP is not your best option, our certified financial counselors will help you find someone who can help. Call DMCC today at 1-866-618-DEBT for more information about your options to get out of debt.

Debt Settlements

A debt settlement program involves hiring a debt negotiator to negotiate with your creditors and achieve a significant reduction in your overall debt. Successful debt settlement programs result in you owing only a fraction of your original debt. However, this settled amount usually must be paid in one lump sum payment. Debt settlements can also hurt your credit history and subsequently your credit score. Unless otherwise negotiated, settled accounts are not considered “paid in full.” The negative information will stay on your credit report for 7 years. DMCC can help you analyze your financial situation to find out if a debt settlement is right for you. We can also refer you to a reputable debt settlement company. Call us at 1-866-618-DEBT for more information.

Bankruptcy

People who face severe debt delinquency may consider bankruptcy as a viable option. All collection activity will cease from the time an attorney represents a client or when the initial bankruptcy papers have been filed. Bankruptcy is a serious decision. DMCC can help you decide if bankruptcy is the right option for you and may be able to offer you alternatives to avoid it. Call us at 1-866-618-DEBT to speak to a certified financial counselor about your situation. We strongly recommend that you also speak with a bankruptcy attorney if you are considering this option.

DMCC is a 501 (c)3 is a charitable organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with their debt.  Education is provided free of charge to consumers as well as personal counseling to identify the best options for the repayment of any unsecured debt. To speak to a certified credit counselor, call 1-954-418-1466, email contact@dmcconline.org.

DMCC is located at 700 West Hillsboro Blvd., Building 1, Suite 105, Deerfield Beach, FL 33441.

Depending on the circumstances, when you apply for credit, you may receive a notice with information about your credit report or credit score. The new rules introduce several types of notices:

• Credit Score Notice. In some cases, you will get a notice that states your credit score and information about how it compares to other consumers’ scores. A lender would provide this “credit score notice” to all credit applicants, whether you apply for a mortgage, auto loan or another type of credit.
• Risk-Based Pricing Notice. Not all lenders provide a credit score notice to all applicants. Instead, you may receive a “risk-based pricing notice”. You would only receive this if you are offered credit on terms that are less favorable than the terms offered to other consumers because of information in your credit report. For example, you may receive this type of notice if you have negative information in your credit report and you are offered a loan with an annual percentage rate (APR) that is higher than the APR offered to other consumers who apply for that loan.
• Account Review Notice. If your APR on an existing credit account is increased based on a review of your credit report, you may receive an “account review notice”. For example, some credit card issuers conduct periodic reviews of customers’ credit reports. If there has been a change in your report since you initially applied for the card, the issuer may increase your APR. Under these circumstances, you would receive this notice providing you with the credit report information that resulted in the APR increase.

What do the notices do for me?

These new notices give you the opportunity to check the accuracy of the information in your credit report. The notices identify the credit bureau that provided your credit report or credit score to your lender, allowing you to dispute any information that you believe is incorrect. All of the notices provide information on how to obtain a free credit report. In addition:

• A “credit score notice” will include your credit score. You can check the accuracy of your credit report by obtaining a free annual credit report, which is available to all consumers regardless of whether they have received a notice.
• A “risk-based pricing notice” or an “account review notice” will not include your credit score, but will include information about how to obtain a free credit report from the credit bureau identified in the notice within 60 days of receiving that notice. This report will be in addition to the free annual credit report available to all consumers.

What should I do if I receive a notice?

1. Review the notice. If you receive any of these notices, read it carefully to make sure you understand how your credit report or credit score may affect the price you pay for credit. Ask the lender to explain anything in the notice that you do not understand.
2. Obtain and examine your credit report. If you get a “risk-based pricing notice” or an “account review notice”, get your free credit report by following the instructions on your notice and review the information in it right away. If you get a “credit score notice”, and you are surprised by how your credit score compares to the scores of other consumers, you may want to get your free annual credit report from the credit bureau identified in the notice and review it for accuracy.
3. Dispute any errors. If you find errors in your credit report, you may dispute the information and request that the information be deleted or corrected.

Article provided by www.federalreserve.gov

“GET CASH UNTIL PAYDAY! . . . $100 OR MORE . . . FAST.”

The ads are on the radio, television, the Internet, even in the mail. They refer to payday loans, cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans. The Federal Trade Commission, the nation’s consumer protection agency, says that regardless of their name, these small, short-term, high-rate loans by check cashers, finance companies and others all come at a very high price.

Here’s how they work: A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday. Or, with the borrower’s permission, the company deposits the amount borrowed — less the fee — into the borrower’s checking account electronically. The loan amount is due to be debited the next payday. The fees on these loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”

The federal Truth in Lending Act treats payday loans like other types of credit: the lenders must disclose the cost of the loan. Payday lenders must give you the finance charge (a dollar amount) and the annual percentage rate (APR — the cost of credit on a yearly basis) in writing before you sign for the loan. The APR is based on several things, including the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your loan.

A payday loan — that is, a cash advance secured by a personal check or paid by electronic transfer is very expensive credit. How expensive? Say you need to borrow $100 for two weeks. You write a personal check for $115, with $15 the fee to borrow the money. The check casher or payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days. If you agree to electronic payments instead of a check, here’s what would happen on your next payday: the company would debit the full amount of the loan from your checking account electronically, or extend the loan for an additional $15. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.

Alternatives to Payday Loans

Before you decide to take out a payday loan, consider some alternatives.

1. Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds: find out the terms before you decide. In any case, shop first and compare all available offers.
2. Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against super-high fees or rates, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates. Even with these protections, payday loans can be expensive, particularly if you roll-over the loan and are responsible for paying additional fees. Other credit offers may come with lower rates and costs.
3. Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
4. Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.
5. Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases: the costs of small, every-day items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan — however modest — can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.
6. Find out if you have — or if your bank will offer you — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems. Find out the terms of the overdraft protection available to you — both what it costs and what it covers. Some banks offer “bounce protection,” which may cover individual overdrafts from checks or electronic withdrawals, generally for a fee. It can be costly, and may not guarantee that the bank automatically will pay the overdraft.

The bottom line on payday loans: Try to find an alternative. If you must use one, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck — and still have enough to make it to next payday.

Protections for Military Consumers:

Payday loans (and certain other financing) offered to servicemembers and their dependents must include certain protections, under Federal law and a Department of Defense rule. For example, for payday loans offered after October 1, 2007, the military annual percentage rate cannot exceed 36%. Most fees and charges, with few exceptions, are included in the rate. Creditors also may not, for example, require use of a check or access to a bank account for the loan, mandatory arbitration, and unreasonable legal notices. Military consumers also must be given certain disclosures about the loan costs and your rights. Credit agreements that violate the protections are void. Creditors that offer payday loans may ask loan applicants to sign a statement about their military affiliation.

Even with these protections, payday loans can be costly, especially if you roll-over the loan. You instead may be able to obtain financial assistance from military aid societies, such as the Army Emergency Relief, Navy and Marine Corps Relief Society, Air Force Aid Society, or Coast Guard Mutual Aid. You may be able to borrow from families or friends, or get an advance on your paycheck from your employer. If you still need credit, loans from a credit union, bank, or a small loan company may offer you lower rates and costs. They may have special offers for military applicants, and may help you start a savings account. A cash advance on your credit card may be possible, but it could be costly. Find out the terms for any credit before you sign. You may request free legal advice about a credit application from a service legal assistance office, or financial counseling from a consumer credit counselor, including about deferring your payments.

Military consumers can contact the Department of Defense, toll-free 24 hours a day, 7 days a week, at 1-800-342-9647, or at www.militaryonesource.com. Information on the Department of Defense rule, alternatives to payday loans, financial planning, and other guidance is available.

To Complain/For More Information

The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a new video, How to File a Complaint, at ftc.gov/video to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

For more information on any state or local protections for payday loans, contact the consumer protection agency in your area. This information is available in the GSA Consumer Action Handbook, at www.consumeraction.gov. The state offices are listed at: www.consumeraction.gov/state.shtml

This article was publised by the FTC. For more information visit www.ftc.gov.

Expect your bank to send you an explanation about how it treats overdrafts; here is an example (38 KB PDF). Here are some key things you need to consider when reading the notice:

The basic facts

An overdraft occurs when you make a purchase or ATM transaction but don’t have enough money in your account to pay for it. For a fee, your bank will cover you when you become overdrawn. This fee can apply each time you overdraw your account.

Generally, banks can cover your overdrafts in one of two different ways:

• Standard overdraft practices. Your bank will cover your transaction for a flat fee of about $20-30 each time you overdraw your account. For example, if you make a purchase with your debit card for $150 but only have $100 in your account, your account will be overdrawn by $50 and your bank will charge you a fee. If you then make an ATM withdrawal for $50, your account will be overdrawn by $100 and you will be charged another fee. In this example, if the fee your bank charges for its standard overdraft practices is $30, you will pay a total of $60 in fees.
• Overdraft protection plans. Your bank may offer a line of credit or a link to your savings account to cover transactions when you overdraw your account. Banks typically charge a fee each time you overdraw your account, but these overdraft protection plans may be less expensive than their standard overdraft practices.

The new rules

• You choose. In the past, some banks automatically enrolled you in their standard overdraft practices for all types of transactions when you opened an account. Under the new rules, your bank must first get your permission to apply its standard overdraft practices to everyday debit card and ATM transactions before you can be charged overdraft fees. To grant this permission, you will need to respond to the notice and opt in (agree).
• Existing accounts. If you do not opt in (agree), beginning August 15, 2010, your bank’s standard overdraft practices won’t apply to your everyday debit card and ATM transactions. These transactions typically will be declined when you don’t have enough money in your account, but you will not be charged overdraft fees.
• New accounts. If you open a new account on or after July 1, 2010, your bank cannot charge you overdraft fees for everyday debit card and ATM transactions unless you opt in. If you open a new account before July 1, 2010, your bank will treat you as an existing account holder: you will receive a notice about your bank’s standard overdraft practices and will have to decide if you want them for everyday debit card and ATM transactions.
• Flexibility. Whatever your decision, the new overdraft rules give you flexibility. If you opt in, you can cancel at any time. If you do not opt in, you can do so later.
• Checks and automatic bill payments. The new rules do not cover checks or automatic bill payments that you may have set up for paying bills such as your mortgage, rent, or utilities. Your bank may still automatically enroll you in their standard overdraft practices for these types of transactions. If you do not want your bank’s standard overdraft practices in these instances, talk to your bank; you may or may not have the option to cancel.

Information retrieved from www..federalreserve.gov.

As previously reported, Congress in 2009 passed a new law for credit cards that helps protect consumers from most instances of sudden interest rate increases and other unfavorable changes in fees and account terms. Most of the rules implementing the law are now in effect, and the remaining provisions will be effective on August 22, 2010. (See The New Consumer Protections on Credit Cards: An Overview.) But here’s something else to know — it’s possible consumers could face account changes going forward, such as interest rate increases on future transactions and the imposition of new fees or penalties.

How can you avoid potential pitfalls in the new world of credit cards? FDIC Consumer News offers these simple strategies.

1. Understand your right to cancel a credit card before certain significant account changes take effect. Under the new law, card issuers now must generally tell customers about certain changes in account terms — in areas such as interest rate and fee increases — 45 days in advance, up from 15 days in the past. In that same notice, they must inform consumers of their right to cancel the card before certain account changes take effect. These notices may come with your credit card bill or through a separate communication. “It’s important to read everything from your card issuer, even what appears to be junk mail,” said Kathleen Nagle, FDIC Associate Director for Consumer Protection. “Be aware of when the new rate or fee will take effect, so you can have enough time to shop around for a new card, if necessary.”

   Consumers who notify their card company to cancel their card before fees are increased or certain other significant changes take effect will still be required to repay the outstanding balance, but they cannot be required to repay it immediately. However, the card company can increase the minimum monthly payment, subject to certain limitations.

   For more about what can happen under the law if you exercise your right to cancel your card, see The New Consumer Protections on Credit Cards: An Overview. Also note that there are exceptions to the 45-day notice requirement. For example, you will generally not receive advance notice of a rate increase on a card with a variable interest rate that will fluctuate based on an advertised index, such as the prime rate.

2. Keep an eye on your credit limit. Some people, even those with good credit histories, have recently seen their credit limits cut back. Reductions in credit lines can be harmful because your borrowing power will be diminished. Also remember that your credit score is based, in part, on what percentage of your credit limit you are using and how much you owe. Borrowers who carry large balances in proportion to their credit limit may see their credit scores fall. And a lower credit score can make it difficult or more expensive to get new credit in the future. How can you reduce the risk that your credit limit will be cut or your credit card account will be canceled? One factor that credit card companies consider is how you pay your bills. “It’s important to show a steady, timely payment history,” reported Evelyn Manley, a Senior Consumer Affairs Specialist at the FDIC. Paying all your credit-related bills by the due date — that includes your credit card bills as well as your car loan, mortgage and other debts — shows that you’re a responsible borrower.

   Also, pay as much of your credit card bill as you can each month. If possible, pay in full, but definitely try to pay more than the minimum balance due.

   What should you do if you’ve already had your credit limit cut? Put a renewed focus on lowering the amount of money you owe on your credit cards.

   Also, consumers who have difficulty making their minimum payments on time may benefit from speaking with a reputable credit counselor to get help or guidance at little or no cost.

   For a referral to a local counseling agency, one option is to call the National Foundation for Credit Counseling at 1-800-388-2227 or visit them at www.nfcc.org. For more information on how to safely pay down credit card debts, including how to avoid scams that target people in financial trouble, check out the new Federal Trade Commission fact sheet “Settling Your Credit Card Debts,” online at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre02.shtm.

3. Decide how you want to handle transactions that would put you over your credit limit. Under the new law, no fees may be imposed for making a purchase or other transaction that would put your account over the credit limit unless you explicitly agree, in advance, that the credit card company can process these transactions for you and charge a fee. “Even if you agree to over-the-limit fees, you have the right to change your mind down the road,” said Luke W. Reynolds, Chief of the FDIC’s Community Outreach Section. “You would simply instruct your card issuer to deny any transactions that would exceed your credit limit and would trigger a fee.”

   In either case, he said, “you still should monitor how much you’ve charged on your card so you don’t exceed the credit limit.”

4. Be cautious with “no-interest” offers. Many retailers, such as electronics or furniture stores, promote credit cards with “zero-percent interest” on purchases for a certain amount of time. These cards allow you to buy big-ticket items, perhaps a sofa or a stereo system, without paying interest for anywhere from six months to more than a year. While the chance to avoid interest payments sounds like a terrific deal, keep in mind that if you don’t follow the rules for these offers, this “no-interest” special could end up being expensive. The reason is, with many of these offers, you must pay off the entire purchase by the time the promotional period ends to take advantage of the zero-rate offer. If you don’t, the lender will charge you interest from the date you bought the item. You would then have to pay interest — at the lender’s standard rate — from the date of purchase. And if the Annual Percentage Rate or APR on the retailer’s card is higher than what you would pay on another card you have, the extra costs could really add up. The APR is the cost of credit expressed as a yearly rate, including interest and other charges.
5. Keep only the credit cards you really need and then periodically use them all. Some consumers have too many credit cards. Among the concerns: Those extra cards can lead some people to overspend. Also, having many cards with no existing balance or a very low balance can reduce your credit score because prospective lenders can conclude that you have the potential to use them and get into debt. For the average person, two or three general-purpose cards are probably enough. Consider cancelling and cutting up the rest. However, also remember that closing a credit card account can temporarily lower your credit score, especially if the cancelled card was one you owned and used responsibly for many years.

   With the credit cards you do keep, remember to avoid large balances on them in relation to the credit limit. And in the new environment, it also may be beneficial to periodically use all of your cards. Here’s why. Even if you pay your card bill in full each month and never pay interest, using your card earns money for the card company because merchants pay a fee each time you use the card. So, consumers who regularly use their cards and repay their debt may be considered valued customers, even if they pay on time and don’t pay interest. “Regular purchases promptly paid off may be enough to reduce the risk of a credit line reduction, inactivity fees and other penalties,” said Susan Boenau, Chief of the FDIC’s Consumer Affairs Section.

6. Do your research before paying high annual fees for a “rewards” card. Rewards sound great in advertisements for credit cards, but the points formula can be complicated, the rules are subject to change, and the benefits may not be as generous as you think. You should always read the fine print and be realistic about your likely use of the card before you accept an expensive annual fee in return for rewards. For more information about using rewards programs wisely, see our article “Points, Cash Back and Other ‘Rewards’ from Your Bank: How to Cash In on the Right Deal,” in the Summer 2009 issue of FDIC Consumer News at www.fdic.gov/consumers/consumer/news/cnsum09/bank_rewards.html.
7. Take additional precautions against interest rate increases. “Although the law puts new limits on interest rate increases, you need to remain vigilant,” Manley added. For example, while card companies cannot increase the interest rate on existing balances except in certain circumstances, they may raise rates on extensions of credit for new purchases as long as proper notice is provided. “If you receive a notice that your interest rate is increasing,” Manley said, “determine whether you have another way to make future purchases, such as by waiting until you have saved enough money for the purchase or by using a card with a lower interest rate.”

   Rate increases also may come in another form. For example, some fixed-rate cards may be converted to variable-rate cards after a notice has been sent to cardholders. This would result in variable rates being applied to new balances.

   Also note that a credit card company can increase the rate on an existing balance if the consumer fails to send the minimum payment within 60 days of the due date. So, it’s very important to avoid being more than 60 days late on a credit card. If you miss a due date, you can avoid a “penalty” interest rate on that existing balance by getting your payment in within 60 days. And if you’re more than 60 days late and that does trigger a rate increase, get current on your credit card payments as soon as possible and then start consistently paying on time. Card issuers are required to reduce the penalty rate if they receive prompt payments for six months.

   In general, what else can you do to get the best rates? Keep in mind that a credit score is built up over long periods, not just over one or two years, so make all your loan payments on time. Even if you have past blemishes, you can improve your credit score over time by managing your credit well. Be aware that if you can only afford to pay the minimum amount due, you probably won’t get the best rates. But if you can pay more than the minimum each month — as much more as possible — that will work in your favor.

   Also, carefully read the terms of a new credit card before using it. If the card has a high interest rate or fees, shop around for a better offer.

8. Parents of young adults have a new opportunity to teach responsible management of credit cards. The new law includes protections for young consumers, including a requirement that anyone under 21 who wants to obtain a credit card must have a qualified co-signer on the account or must prove he or she alone can repay any debt. This is intended to protect young people from getting overwhelmed by credit card debt. But it also offers an opportunity for parents to teach their kids about responsible use of credit cards. “Parents should have discussions with their children about how credit cards should be used and repaid,” said Reynolds. “They may even want to make sure their kids have taken a financial education course before they have access to a credit card.”

   If you’re considering co-signing for a credit card with a young adult, it’s best to have an understanding (if not a written agreement) that you will get early notice of any troubles, including late payments, so you can keep on top of the credit card and work out problems with the lender before your own credit record is damaged. “One way or another,” Reynolds added, “parents should make clear their expectation to their child — the cardholder — that the child will pay the credit card bill on time, and that the child keeps this fact in mind when using the card.”

   And what if, despite your best planning, your child (or any other co-signer for a credit card or loan) can’t or won’t make the payments? As a co-signer, you are obligated to pay the debt to the lender, and not doing so can damage your own credit report.

Final Thoughts

“By enhancing required disclosures, making them more understandable, and limiting the ability to change terms and interest rates on existing balances, the law has given consumers greater control of their credit cards,” said Reynolds. “But the first step in taking advantage of these legal protections and the competitive marketplace is to become more proactive in simple areas such as reading all the communications from your lender and by shopping around for the best deals.”

For additional information about other aspects of the law, see our article in the Summer 2009 issue at www.fdic.gov/consumers/consumer/news/cnsum09/newlaw.html. For more on managing credit cards, visit the U.S. government Web site www.mymoney.gov.

Information retrieved from www.ftc.gov.

Card issuers also must generally provide a 45-day notice before applying an interest rate increase to new transactions (those made more than 14 days after the date of the notice). For example, if customers receive a notice from their card company stating that the Annual Percentage Rate will increase to 24.9 percent, and the notice is provided July 1, that higher rate would apply to transactions made on or after July 16. However, interest on new transactions would only be charged at the higher rate if there is still a balance due after August 15 (the close of the 45-day notice period). As always, if you pay the balance in full by the due date, you can avoid interest charges.

Restrictions on Fees: As with a rate increase on new balances, card issuers also must generally provide a 45-day advance notice of other significant changes, such as new fees or increases in existing fees. However, in addition, cardholders must be notified that they now have special rights when they reject a change in fees. Those who say they want to cancel the account because of the change cannot be required to immediately repay the outstanding balance. The card company can either continue offering the existing payment method on the outstanding balance, give the consumer five years (or more) to pay the balance, or increase the minimum payment up to double the current level.

In addition, consumers will no longer be charged a fee when a transaction causes an account to exceed its credit limit unless the consumer has agreed in advance.

And, initial fees are significantly limited for subprime cards (for consumers with a limited credit history or a bad credit record). In the first year, and with the exception of three types of fees — those for late payments, going over the credit limit or returned payments due to insufficient funds — total fees cannot exceed 25 percent of the card’s initial credit limit.

Note: Proposed rules governing card fees are pending at the Federal Reserve Board. One proposed rule would prohibit credit card issuers from charging penalty fees (including late payment fees and over-the-limit fees) that exceed the dollar amount associated with the consumer’s violation of the account terms. Another proposed rule would ban inactivity fees. Final rules will take effect on August 22, 2010. For updated information, visit www.federalreserve.gov.

Better Billing Practices: Periodic statements must be mailed or delivered at least 21 days before the payment due date.

The law also requires that payments be allocated a certain way to minimize finance charges. For cards with multiple interest rates, payments over the minimum must be applied first to the balances with the highest rate.

In addition, payment due dates must fall on the same numerical day each month.

Protections for Young Adults: The marketing of credit cards on college campuses is restricted. Also, consumers under 21 must have a qualified co-signer or must prove they have the ability to make the required payments for the account.

Information retrieved from www.ftc.gov.