Side Effects of New Credit Card Law

“No good deed goes unpunished.”

It’s one of those sayings a pessimist would pull from his pocket, but rings true when you open the hood of the Credit CARD Act of 2009, a new law that’s supposed to better protect consumers from deceptive credit card company practices.

While you may have heard of this bill and thought, “I pay my bills on time anyway so this doesn’t really affect me,” think again. The law has already spurred some companies to make changes like charging an annual fee to customers who keep zero balances.

And that’s only the beginning of how you could be affected. Now that the companies are expecting lost revenue opportunities when the interest rate provisions take effect, it makes perfect business sense that they will seek new sources of revenue elsewhere.

Some financial experts believe we can bet they’ll be making up for lost profits by doing things like cancelling reward programs, imposing annual fees, cancelling accounts and lowering credit limits.

On the surface, these acts seem more annoying than damaging, but that’s not necessarily the case.

For instance, I received a letter in the mail this week from a credit card company stating that they have cancelled my card, which I’ve had for about five years and have never missed a payment on. The reason? Account inactivity. Admittedly, I haven’t used the card in over a year since I got one that offered better rewards and a lower interest rate. I never cancelled it because I’ve always thought that cancelling cards reflects badly on your credit score (not necessarily true by the way).

How then does the bank cancelling my card impact my score? With all things related to credit, the answer is more gray than black and white.

The act itself will not impact my score – it’s what it could do to my credit availability and debt ratios.

Denise LaBuda, an expert at LifeTuner and financial literacy advocate, notes that a closed account will affect the balance between the amount of credit available and the amount of credit being used. It’s best to try to keep your debt below 30 percent of your available credit, she said.

If you have two cards – one with a $2,000 limit and the other with a $5,000 limit and you currently have a balance of $1,500, your ratio would be about 21 percent. Say your bank decides to close out the card with the $5,000 limit because you haven’t used it in a long time. Your total available credit is now $2,000, and your utilization ratio suddenly jumps to 75 percent, which can really pull down your credit score.

This might not be a big deal if you’re not in the market for more credit, LaBuda said. But if you’re looking to buy a house or take out a business loan, your credit score is what lenders will look at to determine how risky it is to lend to you.

Credit score tip: “To compensate for the closed account you just experienced, request a higher limit on another account to boost your utilization ratio,” LaBuda suggests.

With all the changes coming from banks, it’s going to be even more important to proactively manage your credit history. In my next post, I’ll examine the Great Credit Score Black Box, and look closely at exactly what goes into your score and what doesn’t.

Meanwhile, find out how to get your free credit report (the REAL free credit report, not the one that costs money). And let us know what you’ve experienced related to new credit card laws in the comments below.