By Michelle SingletaryThursday, February 25, 2010
"Credit card debt, does it ever end?" That's a haunting line delivered by comedian Amy Poehler in a 2006 "Saturday Night Live" skit also featuring Steve Martin and Chris Parnell. The sketch was brilliantly and simply titled "Don't Buy Stuff You Cannot Afford." (You can view it at Hulu.com).
So here we are in 2010, contending with a new law aimed at helping cardholders who have gotten deeply into debt for stuff they could not afford and have been kept there by lenders' policies.
This week, the second phase of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act), which put into place a number of consumer protections, went into effect. Here are answers to some of the many questions I've received from cardholders about those protections.
One reader asked: "Can banks still charge over-limit fees if you go over your limit because of monthly interest charges on your account?"
First, the Federal Reserve has created an interactive Web site (http://www.federalreserve.gov/creditcard) to help cardholders understand the new safeguards. One of the site's features is a summary of the new law's main provisions.
Under the law, companies can no longer push you over the limit with fees or interest charges. Those over-limit charges can only be assessed when a transaction or an extension of credit causes you to exceed your limit.
You should also know that issuers are prohibited from making the amount of credit available conditional on the consumer's consent to the payment of over-limit transactions. Issuers also can't charge interest on the fees themselves -- for example, for being over the limit or late.
Most of the questions I'm getting are from people who aren't happy about changes to their credit-card agreements prompted by the new law, and now they want to kick their card and issuer to the curb. However, they are worried about the almighty credit score.
"Do I get penalized if I choose to discontinue using a company's credit card?" asked another reader. "I was told that if you cancel a credit card, it will affect your credit score. It should be my right to cancel a credit card without any penalty from anyone." A third asked: "If I choose to opt out by closing an account that has a balance, and continue to pay down the balance under the current term, will that have a negative impact on my credit score?"
In some cases, closing an account can have a negative impact on your credit scores. For others, there are little or no repercussions.
Determining which group you fall into depends on how much of your available credit you're using on each of your credit cards. You need to calculate your credit utilization rate. What percentages of your credit line are you using? This will help you decide whether to close the account.
What most affects your score when an account is closed is the presence of outstanding balances on other open accounts -- not the closure of the account in itself. The scoring system looks at how much credit you are using compared to how much you have available.
If you have a large outstanding balance relative to your limit, then canceling a card could decrease your score. If you have multiple credit card accounts, all with zero balances, however, you could close one or more if you aren't happy with the new terms with little effect on your scores.
Closing a credit card account won't affect the duration of your credit history. Credit bureaus keep records of closed accounts in consumer credit files for years (seven years for negative information, longer for positive information). A closed account will continue to appear on your credit report where it is accessible for the calculation of FICO scores. The FICO score, the one most lenders use, considers both open and closed accounts when calculating length of credit history.
If you have more questions about the CARD Act, send them to me at firstname.lastname@example.org.
If you own and use a credit card, make it your business to know at least the basics of the new law. If you won't take the time to know what's in the law, I want you to pull out your credit cards right now.
Get a pair of scissors.
Now cut up every single one.
I'm not saying you need to close the accounts just yet, but stop using the cards. Otherwise, you'll just be racking up debt that never ends.