Personal Finance

Amy L. discovered her Chase card had been closed when she went to buy gas on a cross-country road trip.

A professional photographer and mother of three, Amy had opened a "My Points" Visa with Washington Mutual in January 2008. In September that year, WaMu was acquired by JP Morgan Chase -- the nation's largest credit card lender -- and she received a notice that her card would be replaced by an equivalent Chase product.

"I decided to keep the card because I had a great history with it and a low interest rate," she says. In May she received a bonus at work and paid off the balance in full. But in July, after what she calls "an unfortunate event with a curb" Amy had to replace the tires on her Dodge Caravan. She put the $800 cost on her card. One billing cycle later, Chase closed her account.

"The reasons they gave me for closing the account was I had too few open lines of credit and too high of a balance versus my limit," says Amy, who had an auto loan and one other card with a $250 limit and no balance. "Given the fact that I had just paid off the entire balance two months before, that didn't make any sense to me."
 
I've been inundated with emails from consumers like Amy, who've had their credit cards closed, interest rates hiked on existing balances, lines of credit cut and minimum payments raised. Companies are racing to maximize revenue before the Credit Card Accountability Responsibility and Disclosure Act (CARD) goes into effect Feb. 22.

A representative for American Express says the firm notified certain customers in August that it would increase interest rates by an average of 4 percent. "Our pricing needs to be responsive to the business and economic environment, and that's why we found it necessary to increase rates," says spokeswoman Marina Norville.

Wells Fargo, which reported record third-quarter profits this week, told Bloomberg News it plans to raise rates on a majority of customers by an average of 3 percentage points by the end of November. But some consumers are seeing much bigger hikes: One reader, a 31-year customer of Wells Fargo, wrote that the bank raised the rate on his Visa to 19.6 percent from 5.9 percent.

"Despite being a very long term, committed customer to them, there were no 'programs available' for me nor was there any room for negotiation," he wrote, adding the Visa was the only card he carried. His only option is to close the account, which will freeze the balance at 5.9 percent.
 
Debt-free consumers are not immune: Bank of America, which raised interest rates last June, reportedly plans to "experiment" with new annual fees ranging from $29 to $99 starting next year based on "risk and profitability." That means "deadbeats" -- as the industry dubs them -- who rarely use their cards and always pay their balance in full and on time, may be hit with the new charge.

Industry experts are now predicting the death of fixed-rate credit cards, which account for 40 percent of existing accounts, according to Ben Woolsey, director of consumer research for CreditCards.com, a card-comparison Web site. In reality, those cards have never been truly "fixed," since the fine print allowed issuers to raise rates at any time for any reason.

But the new law requires "fixed" rates to actually remain at the same interest rate for the life of the account, so banks are likely to offer only variable-rate cards in the future. Interest is typically calculated by adding the U.S. prime rate to a margin set by the issuer. "I do expect fixed-rates to go the way of the eight-track tape after February 22, 2010," Woolsey wrote in an email.

Consumers who are switched to a variable or a higher interest rate and can't get an alternative product from the issuer have several alternatives.

Option 1: Pay down the debt, quickly. "I would recommend aggressively paying off any outstanding balances once an account converts to variable rates," says Woolsey. He adds that the change to a variable-rate plan might not increase a card's interest rate immediately, but likely will once the economy recovers and the prime rate rises.

Option 2: Opt out and pay off the balance under the old fixed rate and close the account. This could trigger lower credit scores, because it reduces the consumer's pool of available credit. "Losing that available credit can be quite significant depending on the balance on the other cards you carry," says John Ulzheimer, president of consumer education for Credit.com, a card-comparison Web site. 

Here's the "credit utilization" formula: Add up the total amount charged on all of your credit cards last month. Then add up the available credit limits. Divide by the first number by the second and multiply by 100. That's the percentage of available credit you're using -- and it should be less than 10 percent even if you religiously pay your bill in full each month. (People with the highest credit scores have an aggregate utilization rate of 7 percent.)

"Even if you pay in full every month you still have that balance showing up on your report; there's a 30- to 45-day delay to the reality of the balance," says Ulzheimer. "It's a pretty large deficiency in the credit reporting system because it's not real time. Your credit report never shows it is zero unless you don't use a credit card at all."

Option 3: Roll the balance onto a new card with a low introductory rate. Just watch out for balance-transfer fees. Card issuers typically charge 3 percent to 5 percent of the balance, which appears on the first statement. A $10,000 debt could incur $300 to $500 in fees, so look for a card that has no fees or at least a cap. (Also be aware that the introductory rate may not apply to new purchases, which you don't want to make anyway, because the point here is to eliminate the debt.). Look for a new card with a local bank or credit union, which typically offer friendlier terms than the national banks.

A rollover may be the best move, despite the fee. "There are introductory APRs that last for six to 12 months and they are 0 percent in some cases," says Ulzheimer. "Is it smarter to pay a higher interest rate and not have to pay the fee, or pay a few hundred on the fee and pay a really low interest rate, aggressively attack the principle and get it paid off?

"With all due respect to consumers, if getting out of credit card debt was easy and painless, we'd all be in $100,000 of credit card debt," he adds. "There is going to be some pain, whether it's aggressive budgeting or going into a debt-management plan." A free Web site like debtgoal.com can help you do the math.

Option 4: If you can't find a new card and can't afford the payment under the new terms, contact the card issuer. "We have programs to provide assistance to card members facing financial hardships," says Norville of American Express. Alternately, contact the National Foundation for Credit Counseling and meet with a local counselor in your area. Never respond to ads from third-party companies offering to settle your debt. They are scams, and for many people, have turned a small debt issue into a financial nightmare.

For her part, Amy L. is shunning both Chase and credit cards. "I don't think I'll ever have a credit card that I need again, because if you need it, you need another solution," she says. "That's the bottom line -- if you don't have the money and need credit to get it, then you need to reassess your entire financial situation."

For more tips on managing your credit cards, see my blog.