If you haven’t heard about the new credit card reform then here it is. Congress passed this bill to protect consumer from unfair credit card practices. The list below is from creditcardreform.org.
“
The credit card legislation will create the following consumer protections:
- Moves up the Fed’s effective date
- Restricts all interest rate increases during the first year
- Restricts interest rate increases on existing balances
- Increases notice for rate increase on future purchases
- Preserves the ability to pay off on the old terms
- Places limits on fees and penalty interest
- Requires fair application of payments
- Provides sensible due dates and time to pay
- Protects young consumers
- Restricts issuance fees on fee harvester cards
- Requires enhanced disclosures
- Establishes gift card protections
“
Hopefully, this credit card reform will end those nasty practices that banks impose on some of us. Ever since this bill passed Congress our most famous financial adviser Suze Orman has been touting her new credit card strategy. Orman’s old credit card strategy was to pay down the creidt cards with the highest interest first and then build up your savings account. Orman reasoning was why would you sock away money and get somewhere around 2% on a savings account (taxable btw) while paying interest on a credit card as high as 22% (non-taxable). So the idea back then was when you finished paying down the debt at 22% then you would start saving for that rainy day.
Her views currently on this matter has change a complete 180 degrees. Now she wants people to just pay the minimum on the credit card bill and sock away money for a rainy day. Orman’s believes that with the new credit card reform banks and credit card companies will start reducing credit card limits and sometimes completely close out the account once it is paid off. This is partly true. How do I know? I’ve experienced this myself. I’ve have an almost a perfect credit card history. I might have missed maybe 1 or 2 payments in my 10+ years of credit history.
Recently, my bank has reduce my limit by as much as 50%. I think that’s great. Let just say I have never come close to spending even close to the half mark so I didn’t know why they gave me such a high limit in the first place. Another bank of mine actually close my line of credit, that’s also great news to me. I had it open a long time ago and never used it. It was for overdraft protection but the limit was ridiculously high. So for me at least this seems like credit card companies are reducing people’s limit to something that is more manageable and possibly better for the individual.
Orman’s new view is that once you payoff your credit card with the astronomical 22% interest rate the credit card company is going to close your account and then you will have no credit. Then when you are in a bind such as losing your job or some unexpected medical bill you will be stuck without any borrowing capabilities. I just don’t agree with this view at all.
Let’s assume you owe $10,000 and the interest rate on the credit card is 18%. If you make a payment of $200 a month you would payoff the balance in 93 months that’s over 7 years of payments. Remember, this does not include any additional charges/purchase. Paying off your high interest rate credit card will save you money in long run and will help you accomplish your savings goal.
Banks know that if you are a paying customer, especially those that pay on time, you will be profitable for them (with little risk) to keep around. So the idea of a bank will shutter you out once you pay off the debt is simply idiotic.
To reach that financial freedom we all strive to accomplish paying off high interest debt is the probably the best thing you can do for yourself.
Please remember this blog is for general information and is not intended to be legal advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio, and a qualified legal professional before executing any legal documents or taking any legal action.
The first finance tip is simple - have a savings account. If you don’t have a savings account already then go to your bank and open one. This tip seems so trivial but you would be surprise at how many people out there that does not have a savings account. A savings account is the first of many financial steps to greater financial security. However, before you open your account make sure there is no monthly fee associated with the account and shop around for the best interest rate.
