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Read The Fine Print

Wednesday, July 29, 2009
4 Steps To Stay Credit Card Savvy In Troubled Times
By Kim O'Connor

You might mistake the credit card horror stories for urban legends if they weren’t being reported by every major news source. Countless Americans are struggling with the changing terms of their credit card agreements. Lenders are instituting new fees even as they lower credit limits. Interest rates are spiking, and grace periods are shrinking with little warning to card holders.

All this leads to one burning question: Can credit card companies really do that?

The answer, unfortunately, is yes—for now.

Anatomy Of A Crisis

It seems like everyone is overextended in this difficult economy, and many consumers are leaning on credit cards more than usual to see themselves through.

This is especially true for micro-business owners, who often depend on credit cards as a source of financing even when times aren’t tough.

In an April 2008 survey of NASE Members, 47 percent of respondents said they often use credit cards to help with cash flow needs. A year before, 31 percent reported that they rely on credit cards as the primary source of money for launching or maintaining their business.

It’s easy to see why. Historically, credit cards have been a flexible, accessible and cheap source of funding. But that’s changing.

The New York Times recently reported that lenders wrote off more than $20 billion in bad debt in the first half of 2008. Since then, the mortgage crisis has deepened and the unemployment rate has risen, causing experts to project even more severe losses for 2009.

In response, credit card companies are taking drastic measures to mitigate their losses. They’re raising interest rates (also known as rate-jacking), imposing new fees, reducing credit lines, and shortening grace periods for millions of customers whose accounts are in good standing. Business owners who have never been late with a payment are watching their credit scores drop and their interest rates rise through no fault of their own. And as experts’ economic forecasts grow increasingly grim, even more cardholders are at risk for rate-jacking and other damaging adjustments to their accounts regardless of their own fiscal health.

As a result, the credit crisis has left many borrowers feeling out of control and powerless. While specific terms vary across lenders, card holders are shouldering more risk than ever before. Most credit card companies can change the terms of your agreement for no real reason—a widely criticized practice that has long been perfectly legal. The problem is that major lenders are exercising this right more frequently and more broadly than ever before.

The good news is that help is on its way. Federal legislation that was passed at the end of 2008 will provide key protections for card holders by July 2010.

Meanwhile, protect your business credit card accounts by monitoring your credit score and following a few simple steps.

Step One: Get to Know Your Service Agreement

Now is the perfect time to review the terms of your credit card agreement. Most are available for download online or you can call customer service to request a hard copy.

Keep your eyes peeled for language about:
  • Universal defaults (when missed payments on other accounts influence the terms)
  • Late payments
  • Late fees
  • Over-the-limit fees
  • Interest rates
  • Notification procedures
If the thought of all that small print makes your head swim, follow the suggestion of Gene Fairbrother, the lead micro-business consultant for ShopTalk 800. He suggests downloading the PDF of your agreement and searching the document for relevant phrases such as “grace period” and “interest rate.”

If you don’t like what you see and your credit score is good, you may want to shop for a better card. A number of online resources can help you evaluate offers; Web sites like indexcreditcards.com and creditcards.com post average interest rates and consumer reviews for hundreds of lenders.

Above all, remember to read the fine print.

Step Two: Scrutinize Your Statements

It’s more important than ever to read monthly credit card statements with care. Watch for changes in your interest rate and your credit limit, and keep an eye out for fees that are buried in the list of your regular charges.

You should be notified when the terms of your agreement change, but it’s easy to mistake the envelopes for junk mail. If your business requires frequent travel, sign up for online statements to avoid missing important information while you’re out of town.

Step Three: Be Proactive When Problems Arise

If you monitor your monthly statements, you’ll be poised to act if and when something bad happens.

Whatever the problem, your first action should be to call customer service; some lenders will work with you to resolve the issue. For instance, many companies will waive a late fee if it’s your first delinquency. It’s always worth your time to ask. Speak with a manager if the first person refuses to help and make sure to document the conversation, recording the date, the time and the name of the person you spoke with.

If the worst happens—your interest rate increases exponentially and the credit card company won’t work
with you to find a solution—keep in mind that you can reject (or opt-out of) the new terms.

Opt-out procedures differ across lenders, so it is critical that you refer to your service agreement for specific instructions. Some cards require a certified letter, while others will accept a phone call. Some require that you close the line of credit, while others will permit new charges through the card’s expiration date. Opting out is a time-sensitive solution that is typically available for 30 to 45 days, so you’ll need to act quickly.

Step Four: Make A Plan


Financial planning has always been vital to the health of your business, but it will become even more important (and more tricky) as the credit crisis evolves.

With the credit card industry becoming more regulated, the problem will shift from dealing with existing accounts to securing new lines of credit—a frightening prospect for micro-businesses that have long had trouble with the strict standards of traditional funding sources like bank loans. Credit card offers are decreasing, companies are approving fewer applicants, and credit limits are shrinking.

“There is no better time to analyze what you’re going to need over the next six months than right now,” says Fairbrother, who points out that the best time for a business to secure a line of credit is when it is financially stable. “This [the next six to 12 months] is a more critical time for small businesses to be planning their finances than any time in the last 50 years.”

Fortunately, sharp eyes and a level head are still worth a lot, even in this economy.

___________________________________________________________________
Kim O’Connor is a freelance writer who keeps one eye on her credit report.





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