Industry experts are cautioning consumers against using plastic excessively especially with President Obama's historic credit card legislation taking effect soon.
Analysts say that banks and card issuers are trying to milk as much profit as they can from cardholders by increasing fees and charges. Come February, such actions are no longer legal. Because of this, banks are slashing credit lines, hiking up rates, and even moving payment dates to force cardholders to pay even more.
Many in the banking industry believe that the continuing recession coupled with the mounting losses can lead to higher charges and fees when the new law takes effect. Officially called the Credit Card Accountability, Responsibility and Disclosure Act, the new legislation will impose tougher regulations on the credit industry over several phases starting next year.
The new law promises to protect consumers from bank practices considered unfair by many consumer groups and lawmakers. By August, card issuers have to mail statements 21 days before the due date instead of the previous 14 required by law. Banks and other financial institutions also have to inform cardholders about rate increases 45 days in advance.
When the new law takes full effect next year, more mandates would be implemented, effectively curtailing some of the most lucrative and profitable sources of income by card issuers.
For starters, payments made in excess of the minimum owed will be applied first to the balance with the highest interest rate. This is to ensure that consumers settle their debts in a structured manner without risking penalties.
Despite the government's efforts, experts are advising cardholders to set their own rules and guidelines to monitor their spending habits and prevent large debts.
Analysts say that consumers should avoid letting a relatively unused card be cancelled. A cancelled card would reflect in a cardholder's credit history and score. Bad credit scores will mean difficulty in applying for new cards. To prevent this, experts suggest having a maximum of two cards. These should be rotated on a regular basis.
Experts also recommend placing a self-imposed limit on purchases charged to credit cards. High credit limits can often be tempting, analysts say. They add that by setting a limit based on the credit ceiling, consumers can pay their monthly dues regularly. A 10 or 20 percent cap on a $5,000 credit limit would mean a higher probability for a consumer to meet his monthly minimum payments.
Some banks have also resorted to sending fewer notices and reminders for cardholders. To avoid missing out on important announcements and changes, experts advise consumers to keep tabs on their banks' policies.