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Credit Cards No Longer A “Rainy Day” Option

In between now and February 20, 2010 when the new credit card regulations take effect, the credit card companies are making changes that could end up costing you much more on the balances and credit terms that you now have.

Some credit card companies are arbitrarily changing the minimum payment from 2% to 5%. This does not seem like a huge difference but it really adds up if you have a high balance. Also many people are seeing their credit limits decrease and even having their interest rates increase.

After February 20, 2010 the credit card companies will no longer be able to make any changes to the interest rates on existing balances on fixed rate cards. However, many of the credit card companies are now pushing variable rate cards and you may no longer even be able to get a new card with a fixed rate.

A variable interest rate is tied to an index, such as the prime interest rate, the consumer price index or any number of possible indexes. When the index rises or falls, so then do the interest rates. At the present time with the interest rates at historical lows, there may not be a huge concern about a variable interest rate on a credit card. However, when interest rates rise a variable rate could mean some unwelcome and difficult rate increases.

If your credit card company attempts to switch your fixed rate card for a variable rate card, you may reject the change, however, most of the time this will mean that your credit card will be cancelled at the end of the current agreement cycle. If this happens and you are carrying a balance, your credit score will take a hit because you will show an existing balance that is higher than your available credit limit.

Therefore if you have a card that is being switched to a variable interest rate it would be best for you to continue making payments on the card until the balance is completely paid off. At that time if you decide to cancel the card it will not affect your credit score so much.

You could also pay off any existing balances and then use the card for purchases that you pay off every month. That way you will be avoiding interest charges, you will still have the card and the card company will also not be able to charge any type of “inactivity” fee, which is another fee that is becoming common in the current economic environment.

It is no longer viable to keep a credit card “in case of emergency”. The fact is that in the case of emergency you may not be able to have access to the card. Companies are canceling cards due to inactivity, assessing additional charges, decreasing limits and more. Credit cards are no longer a good “rainy day” option.

Now it is more important than ever to have a savings account for your “rainy days” funds.

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