Expert Weighs In On Credit Cards

Joan Goldwasser, reporter for Kiplinger Personal Finance, discusses credit cards. She answers listeners' questions about credit card debt and interest rates.

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MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

It's no secret times are tough for many Americans. And for the 80 million or so who have credit cards, they're also getting complicated. Credit card companies have been hiking interest rates and tacking on fees, sometimes without warning or explanation.

NORRIS: Last week, President Obama met with the heads of the major credit card issuers and threw his support behind congressional reform efforts. The Federal Reserve has already issued tighter credit card regulations, but those don't go into effect until July 2010. Until then, it's just you and all that fine print in your credit card statements. So we've spent the last week asking for your credit card questions.

And as promised, we've brought in Joan Goldwasser to help answer them. She covers the credit card industry for Kiplinger Personal Finance.

Welcome back to the program.

Ms. JOAN GOLDWASSER (Reporter, Kiplinger Personal Finance): Thank you. It's good to be here.

SIEGEL: And here's the first question from a listener. It's a recorded message. Here it goes.

Mr. SCOTT BUNTZ (ph): My name is Scott Buntz from Chatham, Michigan. Recently, my credit card interest rate was doubled, even though I had not been delinquent on any payments and have always paid more than the minimum. The credit card company has given me the opportunity to opt out of the interest rate increase, which keeps my credit card account active, but does not allow me to use the credit card anymore. My question is: Is it better to take this option or to cancel the account altogether?

Ms. GOLDWASSER: Generally speaking, I'd say it's better to take that option and stop using the card. That, of course, assumes that you have another card that you can use for any purchases you want to make. You don't want to cancel the card because that will affect your credit risk. And one of the important components of it is how much you owe, that makes up about 30 percent of your score, and part of that depends on how much of your available credit you're using.

If you cancel your card, you're eliminating that line of available credit, and therefore you'll be using a larger amount of your total credit.

NORRIS: And just to follow up there, Joan. This listener, Scott Buntz, said that he's never been delinquent and he's always paid more than the minimum. So, why would the credit card company make this adjustment?

Ms. GOLDWASSER: It's hard to know for a specific individual, but it could be because he is having trouble in some other area of his life. You know, credit card companies will look at your payment record on everything, whether it's your home mortgage, your insurance, your, you know, utility bill, whatever. If you happen to be delinquent on one of those, that's a red flag. They also are looking at people who live in your neighborhood. If you happen to be in an area where there are a lot of foreclosures, that's a red flag.

SIEGEL: Here's a question from Lonnie Trotter (ph), a listener in Corpus Christi, Texas, who says, some credit cards are reducing our credit lines. Does this hurt our credit score? Does it?

Ms. GOLDWASSER: It can. A credit score is basically snapshot in time. The companies look at your whole record on a particular day and it records, you know, how much you've spent as of that moment and how much available credit you have.

So if your credit limit is reduced, you are spending a higher percentage of your total available credit. And that is a bad thing. You never want to spend more than 50 percent, and it's better to keep that utilization ratio at 30 percent.

SIEGEL: So if you had a $10,000 credit limit and you're carrying a balance of $3,000, 30 percent, your credit score looks pretty good?

Ms. GOLDWASSER: Yes.

SIEGEL: But if the company then drops the limit down to $5,000, now you're borrowing at 60 percent of your credit limit.

Ms. GOLDWASSER: Right. And you look much riskier even though you haven't actually spent any more money.

NORRIS: Well, from Texas to New York, we have another question from a listener. Let's listen to this one on tape.

Ms. JOANNA JUVIESKI (ph): Hi, I'm Joanna Juvieski from Kenmore, New York. Last month, AT&T Universal card charged me a 3 percent surcharge on an airline ticket purchased from Air Canada. And I called them to question it. And they told me that all credit cards were now charging 3 percent for foreign transactions. And I'd like to know if this is really true.

Ms. GOLDWASSER: Unfortunately, it is true. Credit card companies have almost universally charged 3 percent on transactions that were made outside the United States in another currency. They've recently changed their policy so that any transaction made in another country, even if it's made in dollars, also incurs that same charge.

Capital One is actually the only major credit card company that doesn't have a surcharge, and most of the credit unions only charge a 1 percent fee.

NORRIS: Martina Bailey (ph) listens to the program in New York City, and she has this question. She wants to know which provision, if any, in the contracts empowers the credit card companies to change the terms retroactively. Can you walk us through this?

Ms. GOLDWASSER: Basically, credit card companies can do whatever they want. They have to give you 15 days' notice when they change your interest rate, whatever term, you know, the penalty fees, whatever it is. And right now, that's the only restriction on what they can do. This has been true for, you know, 40-some years. The only effect that - the one restriction, this 15-day notice was put on in 1971 and there haven't been any changes since then.

NORRIS: When they do change the rate on your credit limit - this is something that Robert and I have been talking about in the studio.

SIEGEL: Mm-hmm.

NORRIS: When you get that credit card statement and it has all that fine print, what should you be looking for? Where will it state that they're planning to change your rate, or change your credit limit, or raise the late fee?

Ms. GOLDWASSER: Usually, it's in all of that fine print that, you know, is attached to the back of the statement. Sometimes there'll be a box at the bottom, which will tell you what the interest rate is and your credit limit. And you should look at all of those boxes. And unfortunately, you should also look at the fine print.

SIEGEL: We have time for one more listener question. This is from Tim Holzford (ph) of Columbia, Missouri, who passes on this piece of information. He says - this is the case. He says, call your cardholder. The rate hike that you received was probably generated by a computer algorithm. If you've been a good customer, a credit manager will likely adjust your rate. Is that true?

First of all, are most rate changes done by computer? And can you actually get a human being to reconsider?

Ms. GOLDWASSER: You can get a human being and it's always worth trying. To a company, they will say, you know, call us. We will work with you. If you're having trouble making your payments, we will, you know, there are things that we can do: lower the monthly interest rate, you know, cut the minimum payment, forgive some of the balance. I mean, there are steps that they can take, and it's always worth calling first. That's great advice.

NORRIS: Well, Joan, change is on the horizon. As we noted, the Federal Reserve will roll out new regulations in 2010. Can you very quickly tell us what will change then?

Ms. GOLDWASSER: You will receive more notice to pay your bill. The bill should arrive sooner, and they will give you more time to pay it. When you open your account, you will be told what your interest rate is - should be explained more clearly. You will know whether it's a rate that is fixed, whether it's dependent on some kind of index. And that rate cannot change for a year unless it is dependent on an index, such as the prime rate, and that index changes. You will have to get 45 days notice if your credit card company is raising your rate or changing your terms.

And then one of the most important things, if you have a card that has several different interest rates, perhaps you got a low-rate balance transfer offer, and you have a higher rate purchase interest rate. Right now, when you make a payment, the payment is applied to the lowest rate. The new regulation say that it either has to be applied to the higher rate, or it will have to be distributed equally between, you know, whatever rates you have on your card.

NORRIS: All that will happen in 2010 automatically.

Ms. GOLDWASSER: All that happens. And the statements will have a clearer format. They should be easier to read and easier to understand.

SIEGEL: Joan, thank you for answering our questions and, of course, our listeners' questions.

Ms. GOLDWASSER: I was happy to do so.

SIEGEL: That's Joan Goldwasser, who covers the credit card industry for Kiplinger Personal Finance. And thanks to all of you for writing.

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