Whether or not the passage of the Credit Card Act was responsible for the unprecedented interest rate hikes that have left many Americans paying interest rates as high as 29.99% is an issue for debate.  I, however, believe the Credit Card Act triggered a domino effect, causing already nervous banks to overreact to the threat of more stringent laws.  This, in turn, fueled a nine month long parade of rate increases from just about every major credit card company, culminating in Citibank’s raising of interest rates to 29.99% two weeks ago.

Even without the new laws, credit card companies were facing massive losses and record customer defaults.  However, the new laws will change the way credit card companies do business, taking away risk controls and fee income that help offset the risk of unsecured lending.  Consequently, as the passage and implementation of the laws became a reality, credit card companies went into overdrive and interest rate notices became as common as pre-approved credit card mailings were two years ago.

Now, after the bulk of interest rate increases have already been passed onto consumers, Congress is looking to push up the implementation of the final parts of the Credit Card Act.  Unfortunately, it is too little, too late.  How much higher can Citibank raise interest rates?  Not more than 29.99%.  The same is true with most other banks, most of which raised rates this spring and summer.  Thus, with interest rates already through the roof, a move to halt rate increases on December 1st would be nothing more than a political sideshow.  And that show is financed by the increased interest rates we are paying in exchange for consumer protections that have done nothing but harm the finances of millions of Americans.

Sources:  http://money.cnn.com/2009/10/28/news/economy/credit_card_practices/?postversion=2009102816

Prior to the credit crunch, the majority of credit card complaints revolved around unfair penalties, most of which were clearly outlined in the terms and conditions of the affected party’s credit card contract.  During the credit crisis, the nature of these horror stories changed.  Rates were being sharply increased, credit limits were being cut, and accounts were being closed with no warning.

Ultimately, however, the horror stories that haunt me the most are the recent ones from Citibank credit card customers.  These customers have tended to have very good credit and long histories with Citibank.  Here is a prime example:

“I received the same 29.99% interest rate increase today and was shocked, to say the least. I have been a loyal customer for nearly 20 years, never missed a payment, never maxed out my account which has a 27,000+ limit, always pay at least twice what was due, and recently paid down my account balance to less than 100.00. And still I get a rate increase; this just doesn’t make sound business sense. If those of us who are “good” customers are getting treated this way imagine how they are treating “bad” customers. I must admit when I called the company they received both “barrels” full of my anger but it didn’t seem to faze them. Their excuse of “due to economic times” we need to increase your rate BS just caused more anger. Let me remind you not only do credit card companies receive income from these outrageous interest rates they also receive income from the numerous fees that they charge. An example of a fee we don’t often think about is the merchandise transaction fee, for every purchase we make the retailer is charge a processing fee for the “privilege” of doing a credit card transaction. The consumer ends up paying for all the fees that the retailer is charge through higher prices.
This is America; I am not opposed to a business making profit this practice just goes to far. Citibank/Citigroup’s practices, as well as others, are the reason we are in the economic crisis we are in today. They received millions of dollars in “bail-out” money from the tax payer, pay out huge “retention” bonuses and have the nerve to raise our interest rates. I say it is time to send them a message loud and clear WE ARE NOT GOING TO TAKE IT ANYMORE!!!! We all need to contact the media, our state and local government official and friends and get the word out about these “SHYSTERS”. I have used my Citibank card for the last time I challenge all of you to do the same.”

Yes, many people have been put in much worse situations.  But if banks are attacking their best customers, what can the rest of us expect.  Halloween is right around the corner, and the future acts of credit card companies may be the scariest things any of us sees this year.

A year ago, most balance transfer offers lasted 12 months, while some were good for as many as 15 months.  On top of that, many credit card companies offered fixed rates for life on balance transfers with interest rates as low as 2.9%.  The days of fixed for life balance transfers are most likely over.  During the past year, many customers who had fixed APR for life balance transfers were rudely notified that they would either have to pay 200% more every month or shift to a higher variable rate in order to maintain a lower monthly payment.

Given the high probability that low fixed balance transfer rates are unlikely to return in the near future, securing a 0% APR for 12 months on balance transfers and using that 0% period to pay down debt is clearly the best option for consumers looking to reduce debt and interest expenses.  On the average, a person with a 15% interest rate and a $10,000 credit card balance can save in excess of $1000 during 12 months with a 0% balance transfer.  With a 29.99% interest rate, such as those being forced on consumers by Citibank, the savings come to well over $2,000.

Hopefully, more credit card companies will bring back 0% offers that last more than 6 months.  Unfortunately, this is unlikely, as credit card companies continue to be very selective when reviewing credit card applications.

For more information on current 0% balance transfer offers, please see the credit card comparison section of Smart Balance Transfers by using the navigation on your left.

If you have not received a Citibank 29.99% interest rate letter (you view the letter here), then for the time being you are in the clear.  However, the Citibank rate increase – which takes effect anywhere from a few months to over a year from now, depending on the expiration of your card and your interpretation of the letter - may be providing some rather frightening insight into the future of credit card rates.  And this insight provides 29.99 reasons to get out of credit card debt now.

Essentially, the new credit card legislationprevents banks from arbitrarily raising interest rates into the stratosphere as Citi has just done.  However, it will not prevent credit card companies from offering you significantly higher interest rates when your credit card expires or when you go online to apply for a new one.  This is a big loophole that may spell trouble for anyone with credit card debt.  Here’s why:

Let’s say you currently have a variable rate credit card with a 14% interest rate.  The variable part of this rate is tied to the Wall Street Journal Prime Rate, which is presently at a very low 3.25%.  Should this rate increase to non-recessionary levels, it will likely jump to around 8%, bringing your interest rate up to 19%.  However, the Prime Rate has been as high as 20% in the late seventies and early eighties and remained around 10% throughout most of the eighties.  At those levels, variable interest rates might not only reach 29.99%, they may jump into the thirties.  And this is for consumers with good credit paying the average interest rate.

Fortunately, a return to double digit prime rates isn’t likely in the very near term.  However, if you check your credit card, the expiration date will likely fall within the next year or two.  When that date arrives, your credit card company has every right to offer you the same 29.99% deal that Citi offered its customers this week, forcing you to either close your account or accept an extortionate interest rate.  Given everything that has happened to credit card users this year, I think this type of tactic may become common very soon.

Citi is the first company to give its customers 29.9 reasons to get out of credit card debt; I doubt they will be the last.  Consequently, the only way to safeguard oneself from these absurd rate hikes is to focus on repaying credit card debt as quickly as possible.  As the name of this website implies, making smart use of 0% balance transfer credit cards is an extremely effective way to reduce monthly interest expenses and pay down credit card balances.  Anyone who can get approved for one of these offers should strongly consider applying, as these offers may not be around much longer.  The new credit card laws will provide consumers with some protection, but credit card companies will find ways to make money, and that money will ultimately come from your pocket so long as you are indebted to them.

1.)  Traditional opt out notices require those who opt out to accept an immediate closure to their account.  You opt out, the card is closed, and that is it. Period.  In the letter I reviewed, it states that the cardholder can use the card until the expiration date on the card.  This wreaks of trickery and my fear is that consumers who opt out but use the card after the opt out date will see their rates increased to 29.99%.

Consequently, I recommend that if you get this letter and choose to opt out that you CUT UP YOUR CARD and CANCEL AUTO-PAYMENTS.  While I don’t know exactly why the accounts are to remain open after the opt out, I think the safest thing to do is expect the worse.

2.)  The letter I reviewed offers a 10% monthly interest rebate.  On a 29.99% APR, that serves to reduce your rate to 27%.  This is clearly a ploy to prevent people from opting out, but if you’re reading my blog, I’m going to assume you realize what a joke that is.

3.)  Rewards, rewards, rewards:  The person who sent me a copy of the rate increase letter informed me he had over 80,000 Thank You Rewards points (also known as Thank You for Nothing Rewards or Thank You for the Bailout Rewards).  On page two of the letter, it states that all rewards will be lost when your account is closed.  Now, once again, because opting out and closing seem to be two different things to Citi, it is unclear when Thank You Rewards points will be forfeited.  However, I strongly recommend cashing in all rewards before you opt out just to be careful.

Ultimately, the only positive thing about this situation is the fact that many of you recieved this letter because you are good customers with good credit.  This means you can get a new credit card, do a 0% balance transfer, and are smart enough to opt out immediately.  Unfortunately, I learned that a lot of people ignore letters such as this, and I hope the mainstream media picks up on this story in time to alert others of this deplorable situation.

In case you haven’t had a chance to read this letter, here’s what Ken Stork (ironic name is real) delivered to mailboxes across America.

View Page 1 of the Rate Increase Notice (PDF, opens in new window)

View Page 2 of the Rate Increase Notice (PDF, opens in new window)

For about six months, our site has been writing about this issue and reading the article by Rich Blake leaves us wondering if he stopped by to learn about the subject before writing his own article.  In it, he points out the issues we have been hammering home since the beginning of spring, namely, 0% rate periods are on the decline, balance transfer fees are increasing, and more and more consumers are having difficulty getting approved for 0% deals.

To get a sense of just how far behind the news curve ABC is, take a look at 0% Interest for 1 Year – Not for Long, first published in May.  Or perhaps Balance Transfers Bite the Dust published in June.  You’ll find the very same ideas published today at http://abcnews.go.com/Business/credit-card-balance-transfers-ending/Story?id=8767730&page=1.  However, when Smart Balance Transfers published these stories, consumers still had time to act.

With mainstream media reporting stories five months after bloggers, it leads one to understand just why these companies are struggling-they are failing to deliver timely information to readers.  In this case, the failure to timely report on the issue of 0% balance transfers probably cost consumers tens of millions of dollars.  And this is  just a small case.

1.)  Check your credit:  Many people who had good and even excellent credit may have experienced credit score drops due to the closing of credit card accounts or the reduction of credit limits.  For example, a person who had a $10,000 credit limit and a $4,000 balance who suffered a 50% credit limit decrease will have likely sustained a pretty hefty decrease in their credit score.  This is because of credit utilization ratios, which influence 30% of credit scores.  If you fall into this category, use a free credit report and score service before applying for a new credit card.

2.)  Apply online, but transfer balances offline:  Credit card companies make it easy to transfer balances online.  However, many credit card companies don’t want your transferred balance.  Thus, when you apply online and elect to transfer balances with your application, you may lead a bank to decline your application or provide a lower credit limit.

3.)  Get the longest 0% balance transfer deal:  Given everything that has happened in the past year, the very fact that it is still possible to get a 0% balance transfer for 1 year is a bit of a miracle.  And finding such a deal is not that easy.  In fact, the average length of balance transfer deals is 6 months, half of what it was a year ago.  In all likelihood, 6 month balance transfer deals will be the norm going forward, so if you have the opportunity to lock in a 0% for a year, do it now.

4.)  Pay the fees:  A year ago, most companies capped balance transfer fees at the greater of 3% or $75.  During the past year, the $75 maximum has been eliminated by nearly all companies and balance transfer fees have risen to 4 or 5%.  However, if a 5% fee is the price one must pay to get a 0% rate for a year, most consumers should pay this fee with a smile.  Considering that average credit card interest rates are 15%, paying 5% in fees and getting a 0% for 1 year will reduce interest expenses by 66%. 

Final Thoughts:  Many people successfully gamed the balance transfer options available in the past five years and avoided paying interest on credit card debt.  Unfortunately, the free balance transfer game is nearing its end.  Thus, while very good deals still exist, its more important than ever to act on these deals before the banks decide they are too generous.

This particular deal (you can view offer details here) comes with the new standard balance transfer fee-5%.  A year ago, paying a 5% balance transfer fee was unheard of.  However, at that time you could get a 0% APR for 15 months or a fixed APR for life at a 2.99% rate.  Clearly, things have changed.

The issue with this offer is that, despite the 5% balance transfer fee, it is the best offer around.  Unfortunately, many consumers may opt to get a shorter 0% period of 6 months to pay lower balance transfer fees.  This would be a huge mistake for anyone who doesn’t intend to use the full year to repay balances.

Essentially, consider the 5% fee your interest rate for the year.  If your current interest rate is 10%, a 0% transfer with a 5% fee will save you 50% on interest.  If your rate is 15%, you’ll save 66%.  Here’s a prime example:  a person with a $10,000 balance on a credit card with a 15% interest rate will pay close to $1,500 in interest over the course of a year.  With a 5% fee 0% APR balance transfer, total interest and fees come to $500, a savings of $1000.

Given the massive changes in the balance transfer market over the past year, the very fact 0% balance transfers for 1 year are still around is surprising.  And I’m not convinced these deals are here to stay.  However, while it is still possible to get a long term 0% APR, consumers should snap up these deals regardless of the balance transfer fee.

To learn more and apply for a credit card that offers a 0% APR on balance transfers for 1 year, please visit the main section of Smart Balance Transfers.

“I received some balance transfer checks from one of my Chase credit card accounts. I used the check to make a payment of $25,000k to my Bank of America credit card, to get a lower interest rate with Chase. When BOA went to cash the check to cover my payment, Chase DENIED the check. So I got hit with a $40 check returned fee. But to top that off, BOA bumped my entire balance to 19.9% instead of 10.9%. BOA said when I made the payment that my balance was cleared, but when the check was returned, they had to put the balance back on my card under “cash advance” now at 19.9%. They said this is “standard practice with all banks”. So I got screwed by Chase AND BOA. I have used those balance transfer offers many times in the past. Didn’t realize that they could decline payment on them. Guess I learned a valuable lesson.” http://www.smartbalancetransfers.com/blog/2009/08/credit-card-companies-cut-credit-limits-to-zero/#comment-6059

Now, as in the first case, the offending bank was Chase.  And, in this case, BOA was “kind” by only increasing the interest rate to 19.9% instead of the standard default rate of 29.99% (Who would have thought only doubling an interest rate would be considered kind, but it actually is?)  Now, balance transfer checks don’t show up in the mail as often as they used to.  However, they are starting to make a comeback.  Unfortunately, they should not be trusted.

In the fine print of those checks, most banks state that they have the right to refuse any balance transfer or cash advance check.  This was clearly the case here, as the bank probably didn’t want to take on a large 0% balance.  However other factors, like credit limit decreases, can also cause a check to bounce.  In a nutshell, there is a small, but definite chance that any balance transfer check could be declined for any reason at any time.  And this can prove very, very costly for consumers.  Rob, whose story was the inspiration for this article, will pay over $2000 in penalty interest this year just for trying to use a check delivered to him by his credit card company.  If BOA was more aggressive, they could have charged him $4000.  Most other banks would have.

The only way to avoid the issues encountered by Rob is to shred balance transfer checks.  If you stand to save money with a balance transfer, apply for a new credit card online and transfer balances.  The new credit card company will honor the balance transfer request or deny it.  But getting denied when you apply for a new card will not cause your rate to double or triple as a bounced balance transfer check will.  In fact, there is no risk when you apply for a balance transfer credit card.  And even though these bouncing balance transfer check incidents may be rare, they still pose a threat to your financial well being.  That is a risk that is not worth taking.

For more information on balance transfer credit cards and to apply online, please see the credit card application section of this website.

Many people who have endured credit limit cuts and account closures have had dramatic reductions in their credit scores due to the heavy weighting of credit utilization ratios, also known as CUR.  Credit utilization accounts for over 30% of a person’s credit score and is based on the amount of credit used as a percentage of available credit.  For example, a person with a $3000 balance and a $10000 credit limit will see score improvements, since their CUR is 30%.  However, if that person’s credit limits are cut to $5000, their CUR goes up to 60%.  This can have a substantial impact on credit scores.

Because credit scores play a major role in the approval process of credit card companies, and getting denied for a balance transfer credit card can decrease an applicants attractiveness to other companies, getting a credit report and making sure your credit score is above 680 should be the first step in applying for a credit card.  If it turns out that your credit score is below 680 by a few points, it may be possible to boost your score in a month or less by taking a few easy steps.  Here are the easiest:

1.)  Pay whatever you would normally pay your credit card before the due date.  This will reduce the balance reported to the credit bureaus which could help your score by a few points.

2.)  Reduce your credit utilization rate by making a double or triple payment.  Using the example from above, paying an extra $505 on $3000 in credit card debt reduces credit utilization by 20%, and brings your total utilization rate just below 50%.

3.)  If you have a credit card that you have used for a long time and have never missed a payment with, consider calling them and asking them for a small credit limit increase of $500 to $1000.  This will increase your available credit, thus decreasing your credit utilization rate. 

Hopefully, when you check your credit report you’ll find a score above 700.  If not, taking appropriate action can boost your score in about a month and help you get better deals on balance transfer credit card, not to mention auto and home loans.

For additional information, please see the free credit report section of Smart Balance Transfers where you can compare offers from companies that offer access to free credit reports and free credit scores instantly online before applying for a balance transfer credit card.

Jeff T. wrote in to share this unfortunate story:

“Just opened a Capital One statement and was shocked to see that my 4.99% “Fixed for the Life of the Account” rate had skyrocketed to 14.9%! Never late on a payment. I called and was informed that there was a notice of increase mailed in February and that nothing could be done now. I had an balance of about $21,000 on the card. I certainly would have opted out had I received the notice (or noticed the notice, as the case may be). I looked at previous statements and there was no reference to the pending rate increase – seems like a common sense thing to mention on an account statement, yes? So, it appears that over the past 3 months I have paid about a $480 extra in interest before I even figured out what was going on (spouse pays the bills). I will never use a Capital One card again. Moreover, I will actively support regulatory reform – something I never would have been inclined to do.”

Simply put, this is absurd.  Jeff’s interest expense increased by close to $2,000 for the first year.  And he had no idea.  One piece of mail he overlooked could cost him $5000 or more in the next 3 years if he is unable to pay his debt.  And the reason he has been put in this situation was a good deal that a bank ultimate chose not to honor, something many others have realized as payment minimums have shot up from 2%-5% on some of these deals, making monthly payments increasefrom reasonable $200 requirements to as much as $700 for some people.  (I’ve even heard of a payment ballooning from $350 to $1200-and they say adjustable rate mortgages are bad!)

For those who have solid credit, getting a new balance transfer credit cardis a good option.  Although 0% rates don’t last as long as they used to, there are still good short term deals with good, low long term APRs.  Unfortunately, none of these long term APRs are 4.99% fixed for life, but many are better than the 15-20% rates consumers are facing.

However, it is always worth a call–or two, or five–to see if you can find someone with a heart at your current credit card company.