Answer: Before the Credit Card Accountability, Responsibility and Disclosure Act went into effect, many credit card issuers applied customers’ payments to the lowest-rate balances on their cards so that their highest-rate balances would continue to accrue interest longer. People who took advantage of low-rate balance transfer offers and then charged other purchases often discovered that their payments quickly paid off the 3.9% balance transfer offer, while their purchases continued to cost them 20% or more.

Early drafts of the CARD legislation would have required issuers to apply borrowers’ full payment to the highest-rate debt, but by the time the law was passed that language had been changed to say that any amounts above the minimum payment would be applied to the highest-rate balance. Issuers can apply the minimum to whatever balance they like, and many continue to apply it to the lowest-rate balance on a card.

If your balances are accruing different interest rates on the same card, you may be better off transferring the debt to other cards that each carry a single interest rate. That way, you’re the one deciding how your payments are allocated.

Answer: If you come across a company touting a new federal law that makes it easier to settle debt, rest assured: It's a scam. There is no such law, and these outfits are capitalizing on people's confusion about changes in credit markets (for another example, see below).

If you're struggling with credit card debt, first make an appointment with a legitimate credit counselor, preferably one affiliated with the National Foundation for Credit Counseling. These counselors can review your situation and see if you could qualify for a debt management plan, which would allow you to pay off your debt over five years or so, typically at a reduced interest rate.

Also, make an appointment with a bankruptcy attorney to discuss your options. Credit counseling is designed to steer you away from bankruptcy, but you may be better off in the long run by filing. Meeting with both a credit counselor and a bankruptcy attorney will give you a better idea of your alternatives.

Some people are able to settle their debts for less than they owe, but many who try wind up getting sued by their creditors. The debt settlement field is filled with scam artists who charge huge upfront fees and then fail to settle any debts. If neither credit counseling nor bankruptcy is a good option for you, you can ask the bankruptcy attorney for a referral to one of the relatively few settlement companies that's legitimate and may be able to help you.

The ding to one’s credit rating can’t be good because the account is listed as “closed by credit” and it causes an immediate increase in the debt-to-limit ratio. This seems wrong, and it must have something to do with the credit reform. But what can we as consumers do to mitigate the damage?

Answer: Issuers actually started closing accounts and reducing people’s credit limits when the credit crunch hit in late 2007 — long before the credit card reform act that was signed into law in May 2009.

The trend accelerated as the recession led to a big spike in delinquencies. Credit card companies fled risk, and among the hardest hit were people with less-than-stellar credit. A low-limit card is typically a sign that the cardholder’s credit isn’t great, and some issuers made the decision to close many of these accounts.

A closed account can ding scores further, but the credit scoring formulas don’t care who closed the account. You don’t lose more points, in other words, if a creditor shuts down the account rather than you closing the card voluntarily.

Your husband’s best option at this point may be to check with a local credit union to see if it would issue him a credit card. Credit unions are often more flexible about credit scores than other issuers.

If he can’t get another regular credit card, another option is to apply for a secured credit card that offers a line of credit equal to the deposit he makes at an issuing bank. He should look for a card that charges no upfront fees, has a relatively low annual fee (under $100) and reports to all three credit bureaus. Sites including CreditCards.com, CardRatings.com and Card Hub list such offers.

Once he has the card, he should use less than 30% of its credit limit and pay it off in full each month. Over time, that should help him improve his scores enough to get a regular card.

Is there any other credit card I can get besides a secured card needing a deposit? I want to refinance my car to get the cosigner’s name off it, but if I have zero credit I’m not sure I’ll be able to.

Answer: You’re right that your apartment rental probably isn’t being factored into your scores. Landlords typically don’t report rental payments to the credit bureaus. But your car loan should be helping build your credit as long as it’s being reported to the bureaus and you’re making every payment on time.

The fact is, building credit when you’re young is tough — and it’s about to get tougher for people under 21, because of new restrictions on credit card issuers that just went into effect.

The Credit Card Accountability, Responsibility and Disclosure Act requires issuers to make sure people under 21 have an independent source of income before giving them a card. If the applicants don’t, they’ll need an adult cosigner.

But credit card issuers were tightening their standards even before the CARD Act was passed last year. Even credit unions, which traditionally have been easier places to get credit, raised their standards for who could get a card.

So unless you can find someone to add you to an existing card as an authorized user, or who is willing to cosign an account to make you a joint account holder, a secured card is probably your best bet.

You’ll want a card that reports to all three credit bureaus and that has an annual fee under $75. You can find offers at CardRatings.com, CreditCards.com, LowCards.com and the Index Credit Cards site

photo credit: barsen

A credit card industry insider recently made an interesting argument that it is.

If you remember, Bank of America pledged on Oct. 6 to stop raising interest rates, then turned around and announced it would start adding annual fees to some customer accounts next year (although from the mail I get, some customers have already been told their accounts will be subject to the fees).

Odysseas Papadimitriou, formerly of Capital One and now CEO of CardHub.com, argued at WalletBlog.com that under laws regulating credit cards, fees and interest rates are considered essentially the same thing. (You can trace this to the 1996 Supreme Court case Smiley v. Citibank.) He calls Bank of America’s actions a marketing bait and switch, and says if the bank proceeds with its plan to implement annual fees it will in effect be raising the costs on existing balances–something that’s prohibited under the credit card reform act now scheduled to go into effect next year.

Papadimitriou points to Chase’s aborted plans to add “inactivity” fees to low-rate balance transfer accounts as another example of promise breaking.

What I’m reminded of, though, is all the times in the past when issuers tried to foist stupid fees on its customers–inactivity fees and fees for not carrying a balance being two of the most egregious examples from the 1990s.

The savviest users always bolted and issuers had to back down. The fees that remained–late fees and overlimit fees, in particular–were mostly paid by the less-savvy consumers.

An issuer that drives away all its smart, credit-worthy customers won’t be in business for long. Previous generations of credit card executives had to learn this lesson the hard way. Looks like the current generation will, too.