New regulations, FICO study big news for credit card holders

DALLAS -  Last week brought significant news to credit card holders.

First, the initial phase of a landmark bill overhauling credit card laws took effect Thursday. And second, a new study shed light on the growing practice of credit card issuers' slashing consumers' credit limits.

The most significant aspects of the new legislation don't go into effect until February. Those provisions include restrictions on interest rate increases and marketing credit cards to people under 21.

Meanwhile, the rules that just kicked in mean that:

- Card issuers must mail credit card bills at least 21 days before their due dates. That's up from 14 days.

"Don't look at this as an extra week to wait and pay your bill," said Bill Hardekopf, chief executive of LowCards.com and author of "The Credit Card Guidebook." "Keep your regular payment schedule and be appreciative for the extra cushion to make sure your issuer receives it on time."

- Card issuers must give you the option to avoid future interest rate increases and pay off any outstanding balance under your current rate.

If you take this option, you won't be able to make additional charges on that card. And you must pay off the balance within five years.

"If you opt out, you must let the issuer know in a timely manner by mailing an opt-out letter to your issuer declining the rate increase," Hardekopf said.

Be aware that you may have to pay more each month to make that five-year payoff deadline.

"The bank can cancel the card and make you pay it off under your old terms, but with a higher minimum payment," according to Consumers Union. "Your new payment could be double your old minimum payment, or higher, if needed, to pay off the card in five years."

- Card issuers must give you at least 45 days' notice before making major changes in terms, such as changing your interest rate or the fees they charge. That's up from 15 days.

Other card changes that require at least 45 days' notice include an increase in your minimum payment and switching your fixed rate to a variable rate.

The law doesn't require advance notification if an issuer closes your account or cuts the credit limit on your card - as many readers report having happen to them.

One reader had a $20,500 limit slashed to $5,100 - a 75 percent cut. Fortunately, she pays off her bill each month.

I have been intensely interested in how much credit scores would suffer from chopping the credit limit. The study released last week by FICO, the company that produces the most widely known credit score, shows the impact isn't cut and dried.

Consumer who carry high balances and have their credit limits sliced to close to their balance could see their credit score suffer. For others, the impact may not be as acute as you'd think.

According to FICO's study, card issuers sliced credit limits for an estimated 33 million U.S. card holders between October and April.

An estimated 24 million consumers saw their credit limits reduced despite the absence of any new "risk triggers" during the study period. Those card holders generally had low balances, didn't use up a lot of their available credit, had very few - if any - reports of missed payments, and had a long credit history.

About one-third of the group, or 8.5 million, saw their credit scores drop after their limits were cut, typically less than 20 points, FICO said.

The cuts had "negligible impact" on the scores of about 3.5 million people, and 12 million consumers saw score increases.

But the study also found that credit scores fare best when consumers keep credit card balances low.

Credit counselors advise not using more than 30 percent of your available credit.

"Consumers who use 70 percent or more of their available revolving credit were found to be 20 to 50 times more likely to become delinquent on a credit obligation within the next two years, compared to consumers who use less than 10 percent of their available credit," FICO said.

So the bottom line is, if you want a high credit score, pay your bills on time, keep your balance low and apply for credit only when you need it.

(c) 2009, The Dallas Morning News.

Distributed by McClatchy-Tribune Information Services.