Cracking down on credit card craziness

Elisa Rizzo of Seattle just got her credit card statement. Her “fixed” interest rate nearly doubled, from 7.99 percent to 14.99 percent, even though she always pays her bill on time and has a good credit score. Why? The bank told her it had to charge the higher rate because of the downturn in the economy. Rizzo says she is “appalled at this action” and wants something done to “stop this madness ASAP!”

Let’s cut to the chase. For years, banks have taken advantage of their credit card customers with excessive fees and unexpected interest rate hikes. People who can barely make their monthly payment are devastated when it doubles overnight. “It is literally in some cases pushing them over the edge,” says credit counselor Renee Chamkunthod.

Help is on the way. In December, the Federal Reserve Board issued regulations to stop what it called “certain unfair acts or practices” that hurt cardholders. Among other things, the new rules will limit unexpected interest charges, prohibit an interest rate hike on pre-existing balances and require a reasonable amount of time for customers to make their payments.

Consumer groups like the new rules. But they say the Fed gave banks way too long – until July 2010 – to implement the changes. Consumer groups want Congress to stop the pain now.

“The Federal Reserve said these are abusive and deceptive practices,” notes Travis Plunkett, legislative director at the Consumer Federation of America. “It’s unfathomable that they would wait a year and a half and let the credit card companies continue to use them.”

Linda Sherry, director of national priorities at Consumer Action, believes the credit card companies “will continue to take advantage of consumers to boost their profits until these rules go into effect.”

Congress is already on the case. Last week, Congresswoman Carolyn Maloney (D-N.Y.) introduced her Credit Cardholders’ Bill of Rights Act of 2009.

“This bill will allow consumers to manage their credit and not get interest rate increases unfairly put on them,” Rep. Maloney says. “They will know the information that is given to them is accurate.”

Know your rights Credit Cardholders' Bill of Rights Act of 2009 The bill does not contain any rate caps, price controls or set fees. It would prevent: — Arbitrary interest rate increases — Excessive fees — Misleading terms — Due date gimmicks — What are considered abusive ways of calculating interest — Giving subprime credit cards to people who cannot afford them The new bill is the same as the one passed by the House last session, with the new provision of taking effect within 90 days of being signed into law. Read more about the bill (.pdf)

Senators Charles Schumer (D-NY) and Mark Udall (D-CO) are co-sponsoring similar legislation in the Senate. “It’s time to give the power back to the consumer,” Schumer says. The bill will do that, he says by outlawing “predatory practices” and banning “unannounced, unfair and deceptive fees and rate increases.”

The Credit Cardholders’ Bill of Rights would do many of the same things the Federal Reserve Board’s rules will do, but much faster. It takes effect 90 days after being signed into law. Rep. Maloney tells me she believes Congress will pass the bill “because the public is demanding it.”

It could happen to you!
Karen Reid is a horse breeder on Fox Island, Wash. She calls what happened to her “absolutely criminal.” Her credit card had a “7.99 percent fixed APR.” The ad states that in several places. But last August, her interest rate jumped from 7.99 percent to 20.39 percent on both her existing balance and new charges.

10 ways to save money in 2009

By Sharon Epperson

CNBC personal finance correspondent

TODAY

updated 10:41 a.m. ET Dec. 31, 2008

You bought a home to build wealth. It's your greatest asset. But now even if you can afford to pay the mortgage, your home is worth less than you paid for it. You've dutifully socked money away in your 401(k), IRA or another retirement account and the value of those investments has dwindled. Those credit cards? You know you should pay them off, but the interest rates are rising at the same time you're trying to whittle down the balance.

The financial pain for many Americans is intense, but would likely feel less acute if you had enough savings on hand. If you had money you could get to at any moment, it could cushion the difference between your income and your expenses, especially if you've been laid off.

Unfortunately, the 2008 National Foundation for Credit Counseling (NFCC) Financial Literacy Survey co-sponsored by MSN Money revealed that the majority of people don't have a sufficient emergency fund, defined as three to six months' income saved. More than one-third, or roughly 76 million adults, say they do not have any nonretirement savings. Although the majority of people are currently saving for retirement, more than one-quarter aren't saving.

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Here are 10 ways to save in 2009. First step, start small.

• Save for one month's expenses. Put 10% of your take-home pay into an interest-bearing savings account. Plan to have saved at least one month's worth of expenses — or better yet, one month's salary — by the end of the year.
• Shop around for the best rate. The bank where you have your checking account may not offer good interest rates on a savings account. Compare rates at sites like Bankrate.com and SavingsAccounts.com. Make sure the institution is FDIC-insured. You can open an HSBC Direct online savings account with just one dollar and earn a 3% rate. No minimum balance required.
• Make direct deposits from paycheck to savings. Some employers will allow you to designate several accounts for your paycheck. Have at least 10% of your paycheck directly deposited to savings, the rest to checking to cover monthly bills. If you can't do direct deposit, have the money automatically taken out of your checking account every month on payday.

Still not finding enough dollars to put into savings? Look harder. Here's how:

Cut back $10/month on 15 expenses. Examine your monthly expenses and see what you can cut out or cut back. If you could carve out $10 a month out of 15 different spending categories, you'd have $150 a month to go into your savings account. That means that in 12 months, you'd have built up a cushion of $1,800, which should see you through most short-term emergencies. (According to Consumer Reports, just brewing your own 16-oz. cup of coffee can save $350 a year.)

Put your raise, refund, monetary gifts right in the pot. Pretend you never received that windfall, however large or small. Since you weren't living on that money before, don't depend on it now. Use an income tax refund, if you're fortunate enough to get one, as the seed money for your savings. Perhaps it'll give you the funds you need for the first month of expenses, but remember your ultimate goal is to save for at least six months' worth.

Start saving for the holidays now. You probably did all of your holiday spending in the last six weeks — or less. Tally up your expenses for this holiday season, including gifts, travel, entertaining. Divide the total by 10 and contribute that amount to your savings each month from January to October. Next November you can start spending that amount, paying cash for your holiday purchases.

Reduce 401(k) contributions and put that money in savings. Continue to contribute enough money to your company's 401(k) to receive the matching contribution, if offered. But if you don't have sufficient cash savings, don't put in any more than that amount. Direct the excess percentage to your savings account. Don't suspend 401(k) contributions altogether, because it's still tax-deferred savings — a big plus. Just make sure you're able to put at least 10 percent of your take-home pay into cash savings. If you put in that amount, you may want to reduce your 401(k) contributions.

You'll also need to set goals for saving this one-month sum and then getting at least three to six times that amount into your cash savings account.

Here’s how to do it
Designate savings for "emergency" only. Many people regularly deposit money into savings only to pull it right back out. Define what constitutes an emergency, and don't touch the money unless it meets the definition. Also, don't keep your money in a checking account, as that makes it too easy to access.

Define your ultimate savings goal or goals. You need to start small, but don't forget the bigger picture. Ideally, to have a really comfortable cushion, you'll need to save at least three to six months' worth of income. In this economic environment, it's wise to set your savings goal at the high end of that range. Once you have your emergency fund in place, you may want to start a "car fund" or "house fund" or "debt reduction fund." Keeping different funds for each purpose can help you see how close you are getting to obtaining those specific goals.

Make saving a family affair. Set a family goal as well. Have your older children set a target of how much they plan to save (from baby-sitting, working at the supermarket or ice-cream store). Younger children can help you gather and count loose change and go with you to the bank to make the deposit. Let everyone know there will be a reward when the goal is met — a pizza party or night at the movies.

Finally, don't be afraid to ask for professional help. If you can't work out a budget on your own, go to a workshop or seminar at a certified credit counseling agency or hire a certified credit counselor. Find one that is certified by the National Foundation for Credit Counseling at www.debtadvice.org.