Friday, March 5, 2010

With Federal Reserve Rates Near 0%, What's Happening to Your Credit Card?

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Kudos to the credit card companies for doing their best to help Americans reduce their credit card debt.

Although, that might not be their intent or desired result. Many credit card holders have received notices in the last few months of dramatic increases in their interest rates and fees, more than one might expect in a financial environment where the federal government is trying to hold interest rates to a minimum.

The reason is a law passed by Congress last May, limiting the ability of banks to adjust credit card rates and fees. Many credit card issuers decided their best mode of defense is to raise rates and fees in advance of the law taking effect in February. Lower rates can then be offered as "special promotions."Credit card issuers are also well aware of predictions that the next credit collapse will be the credit card market, as unemployment continues in the double digits and depressed real estate prices make consolidating debt in a home loan less feasible.

What should individuals do to avoid being hit with higher fees and 28% (or higher) interest rates on their credit cards?

Number one is to avoid carrying a balance on your card on which you will have to pay interest. Only use credit cards with a grace period and pay off balances within the grace period.

Number two is to never miss a payment.
Missed payments not only incur late fees (which have jumped to $50 and more at some credit companies) but also could trigger increases in your interest rate. To make certain you never miss a payment, set up an automatic minimum balance payment from your checking account to your credit card. There's no charge to do so and it could save you considerable funds if a particularly crazy month or travel results in overlooking a bill's due date.

Remember: Credit cards have always been a poor way to borrow money. The rates and calculation of interest charges are set up to benefit the credit issuers, not the consumer. While using a credit card has a number of benefits, including fraud protection and the ability to earn points and cash back, you should only use a credit card for charges you can afford to pay.

Please feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

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