Ask Liz Weston

The average rate on new credit card offers has climbed above 16%, according to an IndexCreditCards.com survey.

Issuers are boosting rates to cope with higher defaults (charge-off rates now exceed 10%) and new restrictions on raising rates that take effect in February.

Higher rates are putting a squeeze on many customers. The old advice, to simply “move your business elsewhere” if you don’t like how you’re being treated, still works if you have high (750+) credit scores. Otherwise, you face a rougher road.

“There is no guarantee that other companies want your business, and no guarantee they’ll offer you better rates even if they accept you,” said Adam Jusko, IndexCreditCards.com’s founder. “The best advice we can give is to have a few cards in your wallet, and patronize whoever treats you the best. If you’re currently relying on a single credit card, you may want to seek an additional card before you need it, so you don’t find yourself in a desperate situation in which you’ll take any offer you can get.”

Dear Liz: I’m a Realtor with a client who has a 719 credit score. If we could get that score one point higher, he could save $5,000 on his home loan. His score was 45 points higher four months ago, and the only change was that one lender pulled his credit a month ago. Can we dispute the huge drop given that nothing else happened? What else can he try?

Answer: It’s extremely unlikely that one inquiry dropped his score by 45 points. Chances are something else changed on his credit reports. Check the balances and credit limits his credit card issuers are reporting. Any narrowing of the gap between the two (such as higher balances or lower limits) could have contributed to the sudden drop.

You can’t really dispute a credit score drop, but if incorrect information is being reported by his lenders, you can dispute that.

In any case, he should be able to boost his score by getting those balances down, preferably below 10% of his credit limits. Even if he pays his balances in full every month, he needs to be concerned about his credit utilization, since the balances reported to the credit bureaus are typically the balances on his last statements.

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.

Dear Liz: When does it make sense to refinance a home? I have a 30-year, fixed-rate jumbo loan. The loan is just over 2 years old with a rate of 6.5%. Should I refinance to 5.75% with zero points? I make extra payments every month with the intention of paying the loan off in 15 years, but I don’t want to be locked into a 15-year rate in case I have some difficult times.

Answer: There are no hard-and-fast rules about when to refinance. When refinancing costs were higher, you typically needed a 2-point drop in rates for a new loan to make sense, but that’s no longer true.

Generally, though, you should avoid refinancing if the new loan wouldn’t recoup its costs within two years. Although the loan you’re considering doesn’t charge “points” — a percentage of the loan paid to lower the interest rate — you’ll still be charged other fees. If the lower payments would offset those fees within 24 months, and you plan to stay in the house at least that long, you might consider replacing the loan.

Another factor to consider is how much longer you’ll remain in debt with a new loan and how close you are to retirement. Ideally, you’ll want to be mortgage-free by the time you quit work.

When you’re just a few years into your loan, as you are, this is less an issue than if you’ve paid down your mortgage for five or more years. In the latter case, you should either consider opting for a shorter loan — 15 or 20 years, say — or make extra payments on a 30-year loan if you otherwise wouldn’t pay off the mortgage by the time you’re ready to retire.

Dear Liz: We keep hearing about credit card companies imposing exorbitant interest rates. Are there no more usury laws? How do they get away with it? The recent credit card consumer legislation is just a slap on the hand.

Answer: You’ve dated yourself just by using the word “usury.” The short answer is that no, there are no longer effective laws limiting the interest rates credit card companies can charge. A U.S. Supreme Court decision in 1978 pretty much negated state usury laws.

The credit card reform act will limit when issuers can raise rates but does not cap them.

Dear Liz: I just received rate increases on two of my credit cards that are together going to send me into bankruptcy. I didn’t think it could happen to someone who has perfect credit, has not maxed out the card and has been steadily reducing the balance and not charging anything, but obviously it can. I had every intention of repaying my debt, but these arbitrary increases — which will add $600 a month to my payments — have made it impossible.

I feel foolish for having this debt at all, but I lost my mortgage business and my husband is in construction. We have had a really bad four years. If they had just allowed me to continue making the payments per our original agreement, I would have been able to continue reducing the balance and they would get their money. This way, they won’t receive any money at all. How does this make sense?

Answer: Credit card issuers know full well that their latest rate increases will send some of their borrowers to Bankruptcy Court. What they’re hoping is that they’ll get enough interest from those who can still pay to offset the losses from those that can’t.

All may not be lost. Many issuers who have instituted these rate hikes offer an “opt out” provision that would allow you to keep your original rate if you agree to close the account. You should contact your issuers to see if this option is available. Closing accounts can ding your credit scores but will cause far less damage than a bankruptcy.

Be realistic about your financial situation, however. The amount of the proposed payment increase indicates you’re carrying substantial debt on those cards. Unless your financial situation improves dramatically, it’s probably only a matter of time until a misstep or another change in terms causes you to fall behind.

If that’s the case, bankruptcy may be a better option than continuing to struggle with debt you’ll never repay.

One third (33%) of consumers say their card companies have altered their rate and terms for the worse, according to a new survey by Credit.com. Those polled reported their card issuers:

• Increased their interest rate–19% (up from 15% in February survey)
• Increased their fees–14%
• Lowered their credit limit–14% (up from 8% in February survey)
• Increased their minimum payment due–12%
• Reduced their rewards program–9%

This national telephone poll was conducted for Credit.com by GfK Custom Research North America from June 12-14, 2009. A total of 1,000 interviews were completed, with roughly 500 female adults and 500 male adults. The margin of error is +/- 3 percentage points for the full sample.

For more on dealing with the credit crunch, read:

• Banks have declared war–on you
• 6 steps for paying off toxic debt
• The credit card party is officially over
• Thaw out your frozen credit

Dear Liz: Can you tell me if the new credit card reform bill will apply to interest rates that were raised in the past? In other words, if a rate was unjustly raised, will the card issuer be obligated to lower it when the new law begins?

Answer: No. Credit card companies won’t have to adjust rates and can continue to raise rates for any reason until the law goes into effect in February 2010. At that point, issuers will be restricted from raising rates on existing balances unless the increase is because of a change in the card’s variable rate, or the rate was in a promotion period which has ended, or the cardholder is 60 days or more late with a payment.

Card issuers will be able to raise interest rates on future purchases but will have to give 45 days’ notice before doing so. The coming restrictions mean card issuers are likely to continue jacking up rates and fees while they still can, industry experts say.

Dear Liz: I just received a letter from my credit card issuer hiking my 8.9% fixed rate to a variable rate of 14.65%. I’ve had the card for more than 12 years, have never been late and have a near-perfect credit score. Are there any fixed-rate cards out there anymore?

Answer: There’s no such thing as a true fixed rate in the credit card world. Card issuers have long been able to change your rate and terms at will, and lately they’ve been doing so with a vengeance.

Regulations will go into effect next year that limit issuers’ ability to raise rates on your pre-existing balances unless you pay late. Congress is considering more restrictions, including one that would prevent issuers from advertising fixed rates unless the rate is actually fixed for some period of time.

The good news is that you don’t have to wait. If your credit scores are high, plenty of other card issuers want your business. You can transfer your balance to a lower-rate card and then pay it off.

As you’ve learned, carrying a balance these days is a fool’s game. Use your good credit as a tool to help you get free of the credit card industry’s clutches, and you’ll be well ahead.

Dear Liz: I’ve had a Bank of America Visa card for years. My interest rate was lowered from 7.9% to 5.4% a few months ago, but I recently got a letter saying that if I did not agree to a 12% rate, I could “opt out” but no longer use the card. I never carry a balance but use the card extensively. It just seems unfair that they can do this. Can I report them to some agency?

Answer: Like other issuers, Bank of America has been raising interest rates across the board, but what’s mystifying is why you care. If you never carry a balance, you don’t pay interest, so the rate is irrelevant.

If you object to card issuers raising rates on principle, contact your congressional representatives, who are contemplating changes that would make it tougher for credit card companies to alter rates and terms.

Otherwise, simply accept the new rate and use the card as you always have.