Clarifying Interest Rate Changes Allowed with the CARD Act

The CARD Act is now in place and providing important protections for credit cardholders. Consumers are saving millions of dollars through some of these provisions, such as the elimination of over the limit fees and the restrictions on interest rate hikes during the first year of an account.

Credit card companies have had to find ways to make up for this lost revenue. Many issuers have increased balance transfer fees, cash advance rates and foreign transaction fees. There are not more cards with annual fees and most every fixed rate card has been changed to a variable rate card.

Based on the 1000+ cards found in the LowCards.com Complete Credit Card Index, the average APR the week before the CARD Act was signed into law (May 2009) was 11.64%. As of last week, the average interest rate had increased over two percentage points to 13.70%.

A new study from Synovate confirms that issuers have increased rates on existing cards. According to their statistics, the average APR in the second quarter of 2010 increased to 14.7% from 13.1% a year ago. Synovate reports the average interest rate is at the highest level since 2001 despite the prime rate being at an historic low. There is now an 11.45 percentage point gap between the two rates, the largest in at least 22 years.

“Higher interest payments are hard on consumers, but it will get even worse if the Federal Reserve starts to make changes that increase the prime rate. Nearly every credit card now has a variable rate and many of those cards have the prime rate as their base. Once the prime rate rises from its historic low, consumers will see a corresponding increase in the APR of those variable rate credit cards,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

There seems to be some confusion among consumers on how the CARD Act can affect your credit card interest rates. Here is some information:

• The Card Act does not cap interest rates. Issuers can still increase your interest rates. However, competition provides its own regulatory-type influence to help anchor down rates and keep them from soaring.

• Issuers have to give a 45-day notice for rate increases unless it is a variable rate card and the card’s index (usually the prime rate or LIBOR rate) increases.

• If your credit card company does raise your interest rate, the new rate will apply only to new charges you make. If you have a balance, your old interest rate will apply to that balance.

• If your credit card’s rate has been increased since January 1, 2009, the new rules require issuers to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate. Since the beginning of last year, millions of cardholders have seen their interest rates increase. Some issuers raised rates to as high as 29.99% for cardholders with good credit. Issuers must also perform a review every six months on accounts that receive a rate increase. The review should determine if changes in key factors (such as cardholder credit risk, payment history, and market conditions) give reasons to reduce the rate.

• If your payment is 60 days past due, the issuer can raise your APR to the penalty rate (30% for some cards). If you immediately make at least your minimum payment on-time for six straight months, then your issuers needs to reevaluate your account. However, if you make another late payment during that six month period, the higher rate could apply indefinitely to new transactions.

• Issuers can still apply your minimum payment to the balance with the lowest interest rate. Due to the CARD Act provisions that went into effect this past February, the remainder of the payment has to be applied to the balance with the highest interest rate.

• Issuers can’t raise your rate during the first year of an account unless your payment is more than 60 days late, or unless it is a variable rate card and the card’s index (usually the prime rate or LIBOR rate) increases.

Here are some tips for consumers regarding their card’s interest rates:

• Shop around for a card with a low rate. Direct mail offers are increasing again. Don’t necessarily apply for the first offer you receive. Compare your offer with others found on the internet.

• Consider transferring your balance to a card with a 0% intro rate for twelve months and a lower ongoing rate. This could be beneficial if the amount of interest you save significantly outweighs the upfront balance transfer fee you will be charged. You need to do the mathematical calculations to determine if this is a financially prudent move for you.

• Pay down as much as  you can on the balance with the highest rate. Any amount above the minimum payment will be applied to the highest rate.

“Paying off your credit card debt is the only way to be unaffected by rate increases. Higher interest rates drain away money that could be used to pay off your debt, extending the time it takes to eliminate the balance. If you have a few extra dollars, make smaller payments more often. Micropayments save on the interest you pay and will help you eliminate your debt more quickly,” says Hardekopf.

Another Sign of Recovery: Credit Card Mail Solicitations Increase 83%

Look no further than your own mailbox to see that the rebound in the credit card industry is underway.

According to a recent study by Synovate Mail Monitor, households in the United States received 640.3 million credit card offers during the second quarter of 2010. This was an 83% increase over the 349.1 million offers mailed during the same quarter in 2009. Several issuers showed very significant increases in volume during the April-June period: Chase quadrupled their mailings and Citi nearly tripled their solicitations.

This increase in mailings follows a 29% jump during the first quarter of the year (481.3 million offers versus 372.4 million).

For the first six months of 2010, there have been 1.12 billion credit card offers sent through the mail. During the entire year of 2009, there were 1.39 billion offers.

“This is an indication that the financial outlook for credit card issuers has improved dramatically. Defaults and delinquencies continue to decline, and they have put new policies in place, as well as some increased rates and fees. They are one again aggressively pursuing new customers, but this time around, they seem to really be focusing on those with good or excellent credit scores,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

In addition to increased mailings, issuers are using incentives to get potential cardholders to sign up for their credit card. 71% of these mail solicitations contain an introductory offer, the highest percentage in the 22 years of Synovate tracking this data. A number of these introductory offers have 0% APR for a certain number of months.

While these credit card mail solicitation figures are hefty increases over the previous year levels, they are substantially below the record 1.58 billion mailings sent during the third quarter of 2005.

Is Your Credit Card Company Upfront with its Customers?

This is a guest post by Odysseas Papadimitriou, founder and CEO of CardHub.com, an online marketplace for credit card offers.

Do you know what to look for before you apply for a credit card? If you’re not prepared ahead of time, there’s a good chance you might miss some key information on your credit card agreement. A recent study from CardHub.com found that many issuers still lack transparency on their credit card applications, despite recent regulations under the new credit card law (Credit CARD Act) meant to promote clarity in the credit industry.

The Summer 2010 Credit Card Application Study evaluated how much information could be gathered on a credit card application without reading the fine print, as this is what most consumers see before they apply for a credit card. The study evaluated the 10 largest issuers on the clarity with which they disclosed essential information such as APRs, common fees, and details on rewards programs. It was determined that the ideal application would have this information clearly displayed, without the applicant having to actively search for it.

Of the issuers evaluated, Capital One and Bank of America ranked the highest, with scores of 96.4 percent and 95.0 percent, respectively. The issuer that performed the worst in the study was U.S. Bank with a score of 59.3 percent. USAA and American Express followed with scores of 77.5 percent and 78.3 percent, respectively.

The category in which issuers performed poorly across the board was clear disclosure of the balance transfer fee. It is particularly important that this fee is clearly displayed because it less likely that a consumer would know to look for it (as opposed to knowing to look for the APRs) and it can cost the applicant a significant amount of money.

Applications were also consistently lacking in information on rewards programs for non-cash-back rewards credit cards. There was often information on how to earn rewards (e.g. one rewards point for every $1 spent), but it was often difficult to find how much rewards points and miles were actually worth (i.e. is 15,000 points worth a trip to Florida or a trip to Europe?). In order to find this information, the applicant typically had to read the fine print and in some cases navigate to an entire new section of the website.

Although clarity was lacking in some areas, there were also signs of improvement. Vague language and phrases such as ‘up to’ and ‘as low as’ were found to have diminished considerably. It was also often fairly easy to find information about the annual fee and in many cases the introductory APRs.

This improvement is encouraging, but the fact remains that in order to truly know what you’re getting into when applying for a credit card, you must carefully read the terms and conditions of your credit card agreement. If nothing else, be sure to look for the introductory and regular APRs for purchases and balance transfers, the annual or monthly fees, the balance transfer fee, and details on your rewards program. This will give you a good start for being your own financial advocate.

Credit Card Debt Continues to Fall

Americans reduced credit card debt for the 21st straight month in June.

The latest Federal Reserve Consumer Credit Report showed that revolving credit, which is primarily credit card debt, decreased in June at an annual rate of 6.5%. It dropped $4.5 billion for the month, and has declined nearly $150 billion since October 2008, from $976.1 billion to $826.5 billion.

This drop in credit card debt is good for consumers and issuers. Delinquency rates are dropping, indicating that consumers are paying down debts to manageable levels and reducing their risk of default. But not all of the credit can go to consumers, since issuers have minimized their risk by maintaining stringent credit card approval rates, slashing credit limits, writing off bad loans and canceling accounts.

“Paying off debt and spending less is good for personal finances. Fewer delinquencies and smarter lending practices are good for banks. However, cutting back on spending and lending is not good for the economy if they go too far and continue for too long. Lending and spending are the oxygen and water for the economy, and our economy will grow weak without a healthy supply of oxygen and water,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

The Federal Reserve is searching for new ways to stimulate lending and revive the economy. Interest rates have remained at historic lows since December 2008, but these low rates have provided little incentive for lenders or borrowers.

On Tuesday, the Fed left its key bank lending rate at zero to 0.25%, the lowest level in decades, and appears to be in no hurry to raise it. The Fed’s announcement said rates will remain “exceptionally low” for “an extended period.” This means rates on some credit cards, home equity loans, some adjustable rate mortgages and other consumer loans will stay low.

Ideally, the low rate encourages businesses and individuals to finance major purchases, generating momentum in the economy. However, interest rates have been at the historic low for a couple years and have not created the spark.

A low prime rate does not guarantee a low interest rate for credit cards. In August 2008, before the recession, the prime rate was 5.0% and the average credit card APR was 12.03%. Today, the prime rate is 3.25% and the average credit card APR is 13.67% according to the LowCards.com Weekly Credit Card Rate Report.

Financially Preparing Your Child for College

It is almost time for your high school graduate to leave for college. Talking with your son or daughter about budgets, credit cards and the dangers of debt should be part of the preparation in sending them off into a life on their own.

“Credit cards represent freedom and independence for college students, especially that first year when living away from home is new and exciting. The more they understand about the correct use of credit and its consequences, the more responsibly they can handle it,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “Money management is not a skill they should learn from their friends or by making mistakes.”

What Has Changed
As of February 22, the CARD Act began limiting credit options for students under the age of 21. While the regulations protect students from aggressive credit card marketing on campus, the law also restricts credit availability for students. If you are under 21 and want to open a credit card account, you will need to show you are financially able to make payments, or you will need a co-signer.

There are many benefits but also some potentially harmful side effects to these regulations. Parents can have more control and more influence over their students’ finances. These strict application requirements will reduce the number of college students with credit cards and credit card debt. But the law also eliminates the opportunity for responsible students to begin building a good credit score at a young age.

Before the CARD Act, it was very easy for college students to get a credit card. Issuers wanted to build brand loyalty early and if students got into debt, the parents typically bailed them out. This also gave responsible students a chance to build a good credit score while they were in college. Today, if college students can’t get a credit card while in school, it limits their ability to start building their credit score. While the credit score may not matter in college, it will matter immediately after graduation. Lenders, employers, and even apartment managers use credit scores to help make judgments about the applicant. A low or non-existent credit score could mean higher rates for loans or even a missed job opportunity.

Payment Options for Students Under 21
* Credit cards. Students under the age of 21 can get a credit card if he or she has a co-signer or has proof of the ability to make payments.

Co-signing should only be an option if your student can use a credit card responsibly. If the student makes a late payment, it also shows up on the co-signer’s credit report. If the student can’t pay off the debt, the co-signer is responsible for all the debt.

As a co-signer, you will also receive a monthly statement. Credit limits can’t be increased without your approval. It is advisable to “opt-out” for over-the-limit coverage; then, any charge that puts your account over the limit will not be accepted. This avoids costly over-the-limit fees.

Sign up for online account alerts. You can receive a text or email when a payment is due, and if there is irregular activity in the account.

“Students can also get a credit card if they have a job or can afford the payments. Credit card issuers give very little guidance in their terms and conditions about minimum income requirements or how they verify income,” says Hardekopf. “The definition of income also varies by issuer. Some include stipends, grants, and scholarships as income.”

* Debit cards. These cards are tied to checking accounts. Opt-out of overdraft coverage to avoid overdraft fees. Online account alerts can notify you when the account falls below a specified balance. Debit cards do not help build credit scores and they may not be a sufficient balance during an emergency.

* Prepaid cards. These can be purchased anywhere, even grocery stores. However, they also have fees, so read the fine print before you purchase.

* Secured cards. These cards have more fees and the interest rate in high, so pay it off each month. But secured cards are relatively easy for anyone to get before it is secured by a prepaid deposit. Make sure that the card reports to a credit agency. Secured cards from Orchard Bank and Public Savings Bank both report to credit agencies.

Credit Card Stats for College Students
According to a Sallie Mae study, 84% of college students had at least one credit card in 2009, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173 which represents a 46% increase over the 2004 figure of $2,169. The average number of cards per student is 4.6. Only 17% pay off their entire balance each month and 22% make just the minimum payment.

Even though these numbers should drop because of the CARD Act, they still show the importance of talking with your students before they get into debt. The CARD Act does not remove this responsibility from parents.

Talk With Your Student About Credit Card Debt
Parents should teach their student how to budget, spend wisely, and use credit. Start with your own credit card bill and use it to explain interest rates, grace periods, and minimum payments. Explain the high rates of cash advances and how to avoid these loans. Show them examples of how much they will pay in interest by only making the minimum payments. Tell them about the fees and penalty rates. Use online payment with reminders to help avoid late payment. Teach them to monitor their credit limit and if you must carry a balance, keep it under 30% of your credit limit.

Make it clear that credit cards are loans that have to be repaid in full each month. If you can’t afford to pay for the item with cash, then you can’t afford the item. Tell them what is a good time to use a credit card for payment (textbooks, emergencies) and what isn’t (clothing, food, entertainment).

Teach them that credit scores will be nearly as important as test scores. Show them a copy of your own credit report and use that as an example of building a good (or bad) payment history with credit cards. They can even review their credit report for free each year to check their progress at annualcreditreport.com.

Give advice on how to avoid credit card theft and what to do if your card or identity is stolen. Don’t let anyone else use your card.

Study Analyzes Changes in Credit Card Industry Since CARD Act

The CARD Act has forced credit card issuers to make a number of good changes that are already benefiting consumers, but there is still room for improvement, so says a study by the Pew Health Group.

The study released last week–”Two Steps Forward: After the Card Act, Credit Cards are Safer and More Transparent–But Challenges Remain”–analyzed and compared the credit card marketplace before and after the CARD Act. The study reviewed credit cards offered inline by the twelve largest banks and twelve largest credit unions–nearly 450 credit card offers.

Here are some of the major findings from the Pew Study:

• Rated continued to increase. Overall, purchase interest rates have increased 30% between December 2008 and March 2010. In December 2008, the median purchase APR was between 9.99% and 15.99%. In March 2010, the range was 12.99% to 20.99%.

• Penalty interest rates received the most attention and criticism in the report. The Federal Reserve rules “permit a creditor to apply an increased rate to an existing balance when an account becomes more than 60 days delinquent.” But the report said that the implementation of the changes has led the emergence of a “troubling new trend.” Some issuers such as Bank of America no longer list the amount and terms of the penalty rate in the terms and conditions. They only include a sentence in the fine print that states they reserve the right to impose a penalty fee. The report argues that this goes against regulations; cardholders are entitled to know the pricing of their account, the penalty rates that could apply, and how high those rates could be. Altogether, one in five penalty disclosures mentioned the right way to “cure” (return to the original, non-penalty interest rate). Only three of ten banks that use penalty rates mentioned the legally mandated cure periods.

• 78% of banks offered an introductory rate for purchases and/or balance transfers. The median introductory period is seven months.

• No surveyed banks offered a fixed rate on any credit card.

• Rewards are not used to penalize cardholders for late or overlimit payments. 23% of surveyed bankcards put limitations on cardholders, preventing them from collecting rewards if there is a late payment or penalty on their account. Some issuers require a reinstated fee for lost points, but this is not described in the terms and conditions.

  For example, American Express will cancel points in Delta, Jet Blue, Hilton Hotels and Starwood Hotels accounts earned for that cycle if you have a late payment fee. They can be reinstated for $29 for each month.

• As of yet, legislation did not generate an increase in new annual fees. The number of cards that charge an annual fee actually dropped 1% from July 2009 to March 2010. However, during that time, the median annual fee increased from $50 to $59 for bank cards.

• Cash advance and balance transfer fees increased on average by one-third between July 2009 and March 2010–from 3% of each transaction to 4%. At the same time, cardholders are reducing their cash advances. In 2009, cash advances dropped by more than 40%.

• Only 5% of issuers disclosed the minimum payment formula as part of the application process. Those that did require 1% of principal balance.

There were also several recommendations from the Pew Study:

• Full disclosure of penalty fees. The issuer should clearly list actions that can trigger the fee, what the fee will be, and how/when the rate will return to a non-penalty fee.

• Monitor transaction surcharges to protect against deceptive hidden costs. Rising balance transfer fees equate to higher effective rates.

• Apply total monthly payment to the balance with the highest rate.

• Penalty rate should be no more than seven percentage points above the non-penalty rate.

• Consolidate all maintenance fees, including annual access membership fees, into a single annual fee so that pricing is clear and easy to understand and compare.

• Remove mandatory binding arbitration clause.

Personal Credit Cards: Better for Your Business?

This is a guest post by Odysseas Papadimitriou, founder and CEO of CardHub.com, an online marketplace for credit card offers.

Running your own business takes energy, organization – and a whole lot of money. Using a credit card for funding a small business can provide you with the resources you need when you don’t have the cash. However, due to small business credit cards’ exclusion from protection under the Credit CARD Act, you should think twice before carrying a balance on your small business credit card.

Even though it’s called a business credit card, the business owner is still personally responsible for the debt incurred at the end of the day. Since the owner is assuming this risk already, it makes sense to use a personal credit card for purposes such as funding or any other expense that you can’t pay back right away. This way the Credit CARD Act will provide the protection you need when carrying a balance.

A personal credit card offers much more predictability and stability for someone managing a business. For instance, the credit card company cannot increase the interest rate on existing balances and cannot apply the penalty APR until you are 60 days delinquent. The Credit CARD Act also enforces a payment allocation system for personal cards that is more advantageous for the cardholder. Credit card companies such as Capital One, Chase, Bank of America, and Citibank do not have to adhere to such restrictions when it comes to business credit cards.

Don’t get me wrong, a business credit card offers its own advantages and can play an important role in financing your expenses. For example, a business owner can set individual credit limits for each employee, which makes managing and tracking expenses much more efficient. Business credit cards also often offer higher credit lines, making it a more effective spending tool when multiple people are using the same account.

These factors make business credit cards an excellent choice – even better than personal credit cards – when used as a charge card. In other words, it is my recommendation that you use a business credit card for making company purchases, but only those purchases that you plan to pay back in full at the end of each month.

When making decisions around financing your business, you should take advantage of what both business and personal credit cards have to offer. The combination of the two will give you the most purchasing power while allowing you to fund your business without being subjected to the whim of credit card companies.

Many Credit Card Issuers Not Providing Full Disclosure on Penalty Rates

Despite legislation to make credit card terms fair and easy-to-understand for consumers, the new regulations have opened the door to changes that can make cardholders “vulnerable and uninformed.”

The Pew Health Group Study (entitled “Two Steps Forward: After the Card Act, Credit Cards are Safer and More Transparent–But Challenges Remain”) released last week analyzed and compared the credit card marketplace before and after the CARD Act. The study reviewed credit cards offered online by the twelve largest banks and twelve largest credit unions–nearly 450 credit card offers.

The study shows that issuers have taken two steps forward in most areas, but also taken a step back with penalty rates. Some issuers no longer provide full disclosure of the terms of the penalty rate, or fail to correctly follow disclosure requirements required by the new Federal Reserve rules.

Before the CARD Act, credit card issuers clearly disclosed the penalty rate and the terms in the application process because this gave t hem the legal right to raise rates immediately and without notice as soon as the accounts became past due or cardholders went over their credit limit. This full disclosure was in their best interest because increasing rates generated more revenue.

After the CARD Act, the Federal Reserve added new rules for the penalty rate. While these rules benefit cardholders, they have also allowed issuers to withhold important pricing information which can leave cardholders uninformed about the complete conditions of their credit card.

Here are the new rules for applying penalty rates:

• Issuers are permitted to apply an increased rate to an existing balance when an account becomes more than 60 days delinquent. Issuers can also increase rates to the penalty rate on new transactions any time after the account has been open for one year.

• The cardholder must be given at least a 45-day notice before the rate is increased.

• According to the Federal Reserve Board rules, “the credit card issuers must disclose if the rate increase is due to the consumer’s failure to make a minimum periodic payment within 60 days from the due date for that payment. In those circumstances, the notice must state the reason for the increase and disclose that the increase will cease to apply if the creditor receives six consecutive required minimum periodic payments on or before the payment due date, beginning with the first payment due following the effective date of the increase.”

• The rules also say that “the notice also must state the circumstances under which the increased rate will cease to apply to the consumer’s account or, if applicable, that the increased rate will remain in effect for a potentially indefinite time period. In addition, the notice must include a statement indicating to which balances the delinquency or default rate or penalty rate will be applied, and, if applicable, a description of any balances to which the current rate will continue to apply as of the effective date of the rate increase, unless a consumer fails to make a minimum periodic payment within 60 days from the due date for that payment.”

“The cardholder must make six on-time monthly payments that start at the time of the penalty, or the issuer can charge the penalty rate indefinitely,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Starting on August 22, 2010, issuers must perform a review of accounts that receive a rate increase. The review should determine if changes in key factors (such as cardholder credit risk and market conditions) give reasons to reduce the rate.

The application of these rules varies widely by credit card company. Here is the terminology used by the six major issuers when describing this penalty rate:

• Chase: If an APR is increased for any of these reasons (late payment, exceed credit limit, payment returned) the Penalty APR will apply indefinitely to future transactions. If we do not receive any Minimum Payment within 60 days of the date and time due, the Penalty APR will apply to all outstanding balances and future transactions on your Account; but if we receive six consecutive Minimum Payments when due, beginning immediately after the increase, the Penalty APR will stop being applied to transactions that occurred prior to or within 14 days after we provided you notice about the APR increase. (Penalty APR is 29.99%)

• American Express: If the Penalty APR is applied for any of these reasons (late payments, returned payments), it will apply for at least 12 billing periods in a row. It will continue to apply until after you have made timely payments, with no returned payments, for 12 billing periods in a row. (Penalty APR is 27.24%)

• Citi: If your APR is increased for either of these reasions (late payment, returned payment), the Penalty APR will no longer apply to existing balances on your account if you make the next six consecutive minimum payments when due. However, the Penalty APR may apply to new transactions indefinitely. (Penalty APR is up to 29.99%)

• Discover: If your APRs for new transactions are increased for a late payment, the Penalty APRs may apply indefinitely.

  (Editor’s Note: Discover seems to have the most reasonable penalty rate; it is five percentage points above the non-penalty rate. The Penalty APR is between 16.99% and 25.99% based on your creditworthiness and other factors.)

• Capital One: If APRs are increased for a payment that is more than 60 days late, the Penalty APR will apply indefinitely unless you make the next six consecutive minimum payments on time following the rate increase. (Penalty APR is 29.4%)

• Bank of America: If this account becomes 60 days or more past due, we may amend the terms of the Agreement to increase all interest rates, including interest rates on existing promotional rate balances.

According to the Pew report, altogether one in five penalty disclosures mentioned the right way to “cure” (return to the original, non-penalty interest rate). Only three of ten banks that use penalty rates mentioned the legally mandated cure periods.

The Pew report points out that some issuers (Bank of America) no longer provide the rate or terms for the penalty fee, only including a sentence in the fine print that states they reserve the right to impose a penalty fee. The report argues that this undermines regulations. Cardholders are entitled to know the pricing of their account, the penalty rates that could apply, and how high those rates could be.

The Pew Health Group recommends that the Federal Reserve bank regulators should ensure full and reliable disclosure of credit card penalty rates because “full disclosure is critical to the success of this policy.” Regulators should also enforce the existing rules in Regulation Z to make sure the penalty rate and the terms are disclosed in advance.

It also suggests that he penalty rate should be no higher than 7% of the regular rate.

Tips for Consumers with Bad Credit Scores

According to a recent FICO study, over one-fourth (25.5%) of Americans have poor credit. Nearly 43.4 million people now have a credit score of 599 or below. When you go to the grocery store or a ballgame, look around–one in four people around you have serious financial problems.

Expect that number to grow as households continue to struggle through unemployment, credit card debt and foreclosures.

How Did We Get Here?

People don’t get into financial problems overnight. It took years of overspending, overlending, and poor regulating to create these problems. Lenders, and even the government, share some of the blame.

The government helped open the door for higher rates and fees in 1978. At that time, a majority of states had usury laws that capped interest rates on credit cards, usually at about 18%. That year, a ruling in Marquette National Bank vs. First of Omaha Service Corp held that national banks could charge credit card customers the highest interest rate allowed in the bank’s home state, instead of the customer’s home state. Taking advantage of this new ruling, many major banks moved to states such as South Dakota and Delaware since those states had no usury limits on interest rates and they could even export these rates to the other states.

In the early 1990′s, credit card issuers advanced beyond one-rate-fits-all offers and used credit scores and financial data to develop pricing and credit strategies. They set rates and limits based on computer assessments of an individual’s risk of default–the higher the risk, the higher the interest rate. This new data led to innovations such as increased credit limits and decreased minimum payments.

“These new, advanced risk assessments created new opportunities to lend to people who were a higher risk including people who should not have had credit. The new loans and higher credit limits were profitable for banks, but made the problem worse for the borrowers,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

In 1996, a Supreme Court ruling (Smiley vs. Citibank) ruled that fees should be included with the balance, and could determined by what the bank’s home state would allow. This ruling allowed issuers to charge more for fees as well as create new fees, such as over-the-limit fees. This ruling also opened the door for punitive practices like the Universal Default clause.

The days of loose lending for mortgages and credit cards, high rates and fees, second mortgages and borrowing beyond more than you could repay couldn’t last forever. The crash occurred in 2008 and caused tremendous losses for borrowers and lenders.

Banks and credit card issuers responded by slamming the brakes on lending. They cut credit lines and increased interest rates. Reduced credit limits hurt borrowers’ credit scores, and higher interest rates made it harder for them to pay down their balance.

Credit card issuers reacted strongly and quickly to protect themselves, but 25% of Americans are practically banned from inexpensive credit at the time they need it. The tightened lending policies shuts off these consumers from many financial options.

Actions Causing Lower Credit Scores

• Debt-to-payment ratio increases. This happens when you add to your outstanding balance, moving you closer to the credit limit; or when the issuer reduces your credit limit. A higher debt-to-credit ratio is considered a higher risk and can result in a drop of about 20 points

• Late payment. Some credit experts believe a few late payments on a credit card or other loans can lower your score by as much as 100 points if you have a great score, or 80 points for someone with an average score. Making payments on time is a big step toward improving your credit score.

• Defaulting on a loan or a foreclosure may lower a score by as much as 200 points.

Here’s the basic breakdown of how long different types of negative information will remain on your credit report:

Late payments: seven years.

Bankruptcies: seven years (Chapter 13) or ten years (Chapter 7).

Foreclosures: seven years.

Collections: Approximately seven years, depending on the age of the debt being collected.

Public Record: Generally seven years, although unpaid tax liens can remain indefinitely.

The good news is that the older the negative item, the less impact it will have on your FICO score. A collection that is five years old will hurt much less than a collection that is five months old.

The Pain

A subprime credit score is just a number. It doesn’t tell the individual story or reasons that a person gets into financial trouble. It doesn’t tell of the stress caused by higher loan rates or increased insurance premiums because your credit score says you are a high risk. But lenders, insurers and even employers will make judgments and decisions about you based on that number.

Car loans, mortgages, credit card loans–all of these cost more when you have a subprime credit score. This puts additional strain on a budget that is already breaking.

“When consumers have made poor financial choices and have damaged their credit score, they are on their own to fix it. There is no federal bailout or TARP fund that will rescue them,” says Hardekopf.

Ways to Raise Your Credit Score

It’s important to note that raising your FICO credit score is a bit like losing weight: it takes time and there is no quick fix. Here are a few tips for raising your credit score:

• Get a copy of your credit report from all three credit agencies. U.S. residents are entitled to one free copy of their credit report from each credit reporting agency once every 12 months. This information is found by calling 1-877-322-8228 or at AnnualCreditReport.com. If any of the information on a report is incorrect, contact the agency to correct it. Incorrect information should be corrected or removed within ten to thirty days, and doing so may give your score a quick boost. Your credit score is usually not shown on the free annual credit report. There are paid options that will allow you to see your credit score.

• Pay your bills on time. This is the single most important factor in your credit score. Even if you only pay the minimum, pay your bills on time. Late and missed payments can quickly lower your credit score.

• Pay off your debt. High balances and high debt ratios drag down credit scores. Your debt balance should be less than 35% of your available credit. If you have a good payment history, contact your creditors and ask for lower interest rates. Then use what you saved in interest to pay down your balances.

• Build a long-term relationship with the accounts you have. A long history of good payments on a car loan, a mortgage, or a credit card increases your credit score. Keep older credit card accounts open, even if you are not using them, because you are rewarded for a long, positive credit history. If you review your credit report and discover that you have many accounts that you no longer use, close the newest ones first.

• Limit your credit applications. Too many new accounts can lower your credit score. Each time you apply for a loan, the application shows up on your credit report. A significant increase in inquiries signals that you are desperate for money and are a credit risk. The exception is shopping for a mortgage or a car loan, as multiple inquiries for the same purpose in a reasonable period are considered a single inquiry.

• Get a checking and a savings account.

• Do not co-sign for a loan for someone else. This shows up on your credit report, and a missed payment or a maxed out credit card by the other person will affect your credit score.

• If you can’t pay your bills, contact your creditor or see a legitimate credit counselor. The National Foundation for Credit Counselors, a not-for-profit organization, can give counseling and help you put together a debt management plan.

New Legal Protections

Under the financial reform bill passed last week, there is now a law dictating that a lender is legally responsible for assessing a borrower’s ability to pay. Lenders will have to verify borrower income to make a loan.

Additional consumer protections and regulations include: free credit scores for those denied credit or offered only higher rates because of negatives on their credit report; brokers can not receive incentives to steer homebuyers into pricier loans; institutions that lend irresponsibly will be penalized

Millions of American’s Credit Scores Hit Troubling New Lows

Over 25% of American consumers (approximately 43.4 million) have credit scores of 599 and below. It is no secret that consumed have relied heavily on debt throughout the past few years, but because of the slow economic recovery and the new regulations being put on credit card issuers after the CARD Act went into effect, these 43.4 million people will now have more trouble than ever getting credit cards, auto loans or mortgages under the tighter lending standards.

The figures proving these new statistics came from FICO, Inc. whose recent analysis is based on consumer credit reports from April up to recently. What is deeply troubling about FICO’s findings is that historically, 25.5 million people fell below the 599 credit score and more are likely to join those in their lowest credit score categories.

On a mildly positive note, the number of people who have a top credit score of 800 or above has increased recently. This can only be attributed to people who have cut spending and paid down debt after consolidating and adjusting to the waves of the recession. There are currently 17.9& of Americans with a credit score of 800 or above.

Now is the best time to begin paying off debt, saving money and doing whatever you can to raise your credit score. Because of the new lending standards being applied by banks, you may not be getting much wiggle room in the world of credit for quite a while.