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Beware of the Changing Rules of Credit Cards: Find Five Ways to Avoid Fees, Penalties and Damage to Your Credit Score

Credit Card Changes

You may have noticed a stream of junk mail coming from your credit card company. At least it looks like junk mail.

"Pay attention to everything that comes," says Adam Levin, founder of credit.com, a card comparison and informational website. "Reports are that (card issuers) have been experimenting with envelopes that look like junk mail, so consumers are less inclined to read them."

Those bland-looking notices may contain critical changes to your credit card agreement, affecting both your pocketbook and your credit score. The new Credit Cardholders' Bill of Rights Act bans some of the worst -- and most profitable -- practices, and card issuers are scrambling to recapture some of that lost revenue and limit the risk of consumer defaults.

Here are five new rules of smart credit-card management:

Just say no to variable-rate cards.
The federal law, which phases in between August 2009 and February 2010, prohibits companies from hiking your interest rate on existing balances unless you're more than 60 days late in paying a bill. If your rate does jump for late payment, the card issuer must lower it after six months of on-time payments following the increase. Also, card companies cannot raise interest rates in the first year after a card account is opened.

In response, more people are being shifted to variable-rate cards, which allow the company to raise interest rates on existing card balances whenever they wish. If your card issuer tries this, call and demand a fixed rate, or close the card and roll the balance over to a card with a fixed rate. (See below.)

Monitor your spending on the card, or be prepared for rejection.
Under the new law, credit card firms can't charge expensive over-the-limit penalties unless you specifically opt-in. And who would agree to pay a fee for permission to exceed her credit limit? But that means consumers have to stay on top of their credit use, otherwise they may have a few embarrassing moments in store when their cards are rejected by a merchant or service.

If you're constantly at your limit on one card, it will hurt your credit score, and the card company may cut your limit to reduce its risk – which will ding your score even more. If you don't pay off your balance in full when the bill comes, rein in your spending and start hacking away at that debt.

Use it, or you may lose it.
On the other end of the spectrum, if you don't use your card at all, you may also see your limit reduced. One of Levin's employees who had an excellent credit score found his credit limit cut by 60 percent. The firm argued he wasn't using his card enough.

"If they give you a $25,000 credit line, they have to have a reserve against the $25,000," Levin explains. "They are trying to limit their risk and exposure, and also see where they can rebalance the balance sheet. One way to do that is not carry enormous reserves -- and so they cut credit limits." Levin suggests using 10 percent of your credit limit, always paying the bill in full at the end of the month.

Understand the cost of roll-overs.
If your credit card company raises your interest rate, cuts your credit limit or closes your account, one solution is to roll your balance over to a new card. Just watch out for balance-transfer fees. They can run as high as 5 percent -- with no maximum limit.

In the past, companies such as Bank of America and Citibank would charge a percentage transfer fee, but cap it at a certain amount, typically $75. No there's no cap. So if you roll over $10,000 in debt to a 0 percent card, you could pay $400 for the privilege, which will show up on your first statement. Do an internet search for a card with no balance-transfer fees, or a lower-interest fee with a cap.

Beware bizarre new fees.
Credit card issuers have shown no lack of creativity when it comes to fresh penalties. Consider the "foreign transaction fees" slapped on transactions conducted in U.S. dollars but processed outside the U.S. A consumer in New York, for instance, bought expensive tickets online for Malaysia Airlines, and Citibank Mastercard charged a 3 percent fee – that cost $150, refusing to waive it when the customer complained. The tariff differed from the more common currency-conversion fee, because the payment was made in U.S. dollars. So if you're planning a trip overseas, you may want to return to that old standby – traveler's checks.

The best plan is to keep your credit card minimally, and pay it off in full. "The ultimate defensive posture is to educate yourself to understand the rules, terms and conditions of your own card," says Levin, "and have a plan to reduce your debt."

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