When the new credit card rules become effective at the end of February, consumers will enjoy more protections and far less uncertainty. Most notably, the era of retroactive interest rate hikes will come to a close; the new credit card law bans retroactive interest rate increases on existing credit card debt, unless the cardholder is 60 days late with payments.
Credit card companies will still be able to increase the interest rate on future charges and make other changes to your account, including increasing fees and raising the minimum payment due. Going forward, however, card issuers have to give you 45 days notice of most changes, and they must give you the right to opt out of any significant changes to the terms in your account. (The opt-out rules unfortunately do not include changes to the minimum payment, which card issuers can still increase without advance notice and without giving consumers the option to opt out.)
While it may sound like it would be to your advantage to opt out of unwanted changes to your credit card terms, look before you leap. The new rules are not as helpful to consumers as they may seem. Here are three good reasons not to opt out of changes to your credit card terms:
1. Opting out closes the credit card account. Opting out doesn’t mean that you can continue to use the card under the old terms. Instead, it effectively closes the account, and you will no longer be able to make purchases with the card. Opting out simply enables you to pay off the balance under the old terms of the account, nothing else.
2. Opting out could ding your credit score. New credit card law or not, closing a credit card account is still likely to hurt your credit score. Closing a credit card can detract from the FICO score in two ways. Firstly, the decrease in credit limit could affect the credit utilization ratio, a critical part of the credit score, which measures how much of the total available credit limit is utilized. For people with many credit cards and no or a low credit card debt in relation to their unused credit, this is not a problem. However, if you only have a few credit cards, and/or a high credit card debt in relation to your total credit limit, the credit utilization ratio, and thereby your credit score, will likely be hurt. In addition, closing a credit card account can decrease the average length of the credit history, another component of the FICO score.
3. Opting out could increase your minimum payment. The new law gives card issuers the option to let consumers who opt out of changes to credit card terms pay off the balance on the card in one of three ways. The card issuer may let the cardholder continue with the same minimum payment percentage as before; or, the card issuer may collect the balance over five years or charge up to twice the current minimum percentage payment required. This could mean that the minimum monthly credit card payment could double, which would present a real problem for consumers who are highly leveraged.
So, if your card issuer increases terms in ways you don’t like, which is your best option? Well, because card issuers can no longer change terms on existing balances, the solution is pretty straightforward. Simply stop using the credit card in question. This way, you will automatically opt out of the changes. The credit card will still show up in your credit report and the credit limit will count towards your FICO score. Further, you don’t risk any changes to the minimum payment terms just because you opted out of the card.
You will still have to pay off any balance on the card over time, of course. As the balance is reduced, this could even help your credit score by improving your credit utilization ratio, as long, of course, as you don’t rake up new credit card debt on another card.
For this option, of course, you need to have a back-up strategy in place. If you don’t already have several other credit cards that you can turn to, consider applying for a new credit card, if your credit is good. Alternatively, you can always join the growing number of consumers who have put their credit cards in the drawer and turned to debit cards or prepaid cards instead.
