In this day and age, even top-notch financial advisor clients can experience problems with their credit cards.

Kathleen Campbell, a fee-only financial planner based in Fort Myers, Fla., is worrying about some of her own clients in particular at a time when card issuers are raising interest rates and minimum payments.

Two of her clients for example, a retired couple, had their home equity credit line slashed by a bank seeking to cut exposure in the area where they lived-even though the couple were making timely payments. They're continuing to pay every month, but something like a costly roof repair, for example, could easily derail their finances.

Another client will likely suffer a major hit to his credit report thanks to Chinese drywall, which has plagued homes built in 2006 and 2007. The widely used drywall is said to emit vapors that cause respiratory illness and corrode metals.

Campbell's client has so far obtained no relief from his home's builder or insurer, and he may soon default on his $2,000-some-odd monthly mortgage payment and move out for his family's safety. He is unable to sell the tainted home and does not wish to incur the financial burden of maintaining that home and renting another.

Unique problems such as these could soon become more complicated at a time when card issuers, in anticipation of new landmark credit card reforms, have been tightening their belts. Issuers have been closing credit card accounts and lowering credit limits-sometimes with no advance notice-even to their most creditworthy borrowers.

Credit card borrowers were supposed to have an easier life these days. After all, President Obama last May signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, enacting far-reaching reform to counter sleazy credit card pricing practices.

But as of August 20, only three major provisions of the act had been implemented:
Cardholders must now have 45 days' notice if there will be any increase in their credit card interest rates or if there is another significant change in their terms. That's up from 15 days before.
Cardholders are required to get notice of their right to reject such changes and cancel the account, usually by calling a toll-free number. If they cancel, the minimum monthly payment on the outstanding balance may rise, but the issuer may not require the full balance at once.
Creditors must mail or deliver periodic statements-including those for home equity lines of credit-at least 21 days before the payment is due. That's up from 14 days.
Most of the other provisions of the legislation, including a general ban on the most retroactive interest rate increases, were slated to take effect next on February 22, 2010 (see the sidebar).

To get a jump on the new rules, large card issuers have already announced new credit card terms-which have triggered borrower complaints. And financial advisors should be the most concerned about this, according to John Ulzheimer, the president of consumer education for Credit.com.

"The reduction in credit limits is happening almost 2-to-1 with people who have very, very strong credit scores," he says.
Experts believe the new credit card act provisions really won't help. For one thing, most cards already have variable rates that are largely exempt from the act's notice requirements.

"Surprisingly, the CARD Act requires advance notification of a rate increase, but does not require advance notification if an issuer closes your account or decreases the credit limit on your card," says Bill Hardekopf, the CEO of LowCards.com.
Clients need to consider how credit line cuts might affect their credit scores in an already tight credit market. A credit score is a fluctuating measure of risk, which can affect a potential borrower's ability to get credit, secure employment and get attractive auto insurance rates. It also greatly influences the interest rate and other terms of a loan. Often, credit scores are proprietary to the credit issuer, but most lenders at least take into account the "FICO" score, issued by Fair Isaac Corp. in Minneapolis.

A FICO credit score of 850 is tops. But FICO scores above 700 are considered very good. FICO scores below 600 indicate high risk.

A Fair Isaac Corp. report estimates some 33 million U.S. cardholders had their credit lines cut between October 2008 and April 2009 before the adoption of the new rules. Some 24 million saw their limits reduced even though they had no new risk triggers in their credit reports, and their credit limits were slashed by an average of $5,100 even though they had an attractive median FICO score of 760.

Of the 24 million good credit risk consumers that had their credit lines slashed, Fair Isaac says one-third, or 8.5 million, experienced a drop in their FICO score. The typical drop was well under 20 points.

Even if your clients don't need credit right now, a closed card account or a reduced credit line may hurt. What can your client do if he or she faces any kind of hardship?

Under the new credit card law, creditors must review any increase in a credit card annual percentage rate after January 1, 2009 every six months, starting next August 22. This means your client, next August, may be eligible for a rate reduction, based on the risk factors that led to the increase.

Ulzheimer says there are a few ways to tweak a credit score. One is that the borrowers can lower the balances by paying down their credit cards. Better yet, they can convert much of their unsecured credit card balances into a secured loan-ideally, a closed-end home equity loan. Secured loans are not only treated much better than credit cards in a person's FICO score, but the interest on the home-secured loans may be tax-deductible.

Consider, though, that converting unsecured debt into home-secured debt may also cause harm if the client is unable to control spending, because then he or she risks losing the house.

A credit score may be helped if a client opens one or two new credit card accounts. Plus, according to Ulzheimer, "right now issuers are still allowed to close down accounts. You want [your clients] to have other options if this happens."

On the other hand, warns Fair Isaac spokesman Craig Watts, opening new accounts can hurt a client who is about to enter a debt management plan.

"If a debt management plan is needed, regaining control of their finances should be the consumer's top priority-not maintaining the FICO score," Watts says. "Opening a credit card almost always lowers one's FICO score at least slightly. That's because adding a new credit obligation makes it statistically more likely the person will become delinquent with a creditor in the near future. For most people, their FICO score will recover over the next several months."

When seeking a new card or cards with better terms, your client might try credit unions and savings institutions, which have less credit card business. Besides being more willing to lend, these institutions may offer better terms than large bank issuers.

Does a client need a credit line increase? Ulzheimer advises against calling the creditor blindly seeking a higher limit. If the lender has to order a credit report, the credit score might be dinged in the process and the line increase may or may not be granted. Ulzheimer says it's better for your client to ask the creditor: "How high can I go from where I'm at without you pulling a credit report?" and then settle for that amount.

If your client must negotiate debt, consider that an interest rate reduction won't be reported to the credit bureaus or factored into a credit score. A debt management plan is noted on the credit report, which may be examined by creditors, but is not considered in the FICO score.

Upcoming Rules
Here are the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 provisions, slated to take effect February 22, 2010:
The card's annual percentage rate can't be raised on existing balances for one year after the account is opened, with certain exceptions.
After the first year, the higher rate is limited to new transactions.
Teaser rates must be disclosed clearly, and can't rise for at least six months.
For cards with multiple interest rates, any payments over the minimum monthly payment must be applied first to the highest-rate balances.
Double-cycle billing, which factors interest charges over both current and previous billing periods, is prohibited.
Disclosures before and after the account is opened must be improved and the cost of credit more clearly detailed.
The act requires standard credit card agreements to be posted online.
It prohibits the switching of monthly due dates for credit cards.
It prohibits fees for exceeding the credit limit-unless the cardholder agrees in advance.
It generally prohibits issuing a card to consumers younger than 21 unless they submit a written application that includes the signature of a co-signer over 21.
It prohibits gift cards and similar types of prepaid cards from expiring within five years from the date they were activated-unless that expiration date is clearly disclosed. Inactivity fees are permitted only in certain circumstances.