You’ve always had a stellar credit score. You keep you balances low or, better yet you pay off your credit cards every month like clockwork. You’ve never, ever had a late payment.
But you got one of those “drop dead” letters from your credit card company. Yikes!
My condolences. It’s gonna hurt, no matter how you cut it.
There are four basic types of love letters credit card companies are sending out these days:
1. Raising interest rates: Your interest rate is going through the stratosphere. Since there is no legal ceiling on credit card interest rates in many states, it could be anything. The highest I’ve heard is 40%. Rates of 19 to 25% have become common.
Many credit card companies are allowing customers to “opt-out,” which means they can keep their old interest rate if they agree to have their accounts closed when the balance is paid and that no new charges will be permitted.
2. Reducing credit limits: Your credit limit is being reduced. That may not seem like a big deal if you’re nowhere near your limit, but it could have a huge negative impact on your credit score. That. In turn will stick it to you big time if you wan to finance a house or a car.
That’s because your credit score is based on the total amount of credit you have form all your credit cards divided by the amount you are using. Let’s say, for the sake of argument, that you have $20,000 in available credit and you’re carrying about $5,000 in credit card debt.
So one or two of your credit card companies get nervous and decides to reduce your available credit to $10,000. That doesn’t seem like a big deal. You’re still only using half of your available credit.
Ah, but here’s the rub. Where you once were using only one-quarter of your available credit, now you’re using half of it. That will ding you to the tune of as much as 100 points on your credit score, even though you did nothing and you didn’t charge so much as an additional dollar.
If you’ve been the recipient of one of the interest rate increases I described in #1, you’ll get a double whammy when you’re a good little consumer and pay off your balance and your account is closed.
3. Raising minimum payments: You’ve got one of those fixed rates and you think you’re sitting pretty because you know your interest rates can ‘t be raised. That’s true so here’ where the credit card companies are doing their “gotcha:” they raise your minimum payment. You scramble through your files to find your agreement, written in “mice type,” as my hero, consumer guru Clark Howard, likes to call it. After spending hours with a magnifying glass, you discover they can raise your minimum payments whenever they like. Now your minimum payment has been increased from 2% of your balance to 5% or more. Ouch!
4. Non usage: You didn’t use that card, so now they’re taking it away from you and closing your account. To prevent this type of punitive account closure, use your cards at least twice a year, even if it’s just to buy a cup of coffee or a tank of gas. Pay it off at the end of the month and feel reasonably assured that your account won’t be closed, dinging your credit as mentioned in #2.
Why are credit card companies doing this?
The answer is simple: New consumer credit protection laws are taking effect over the next few months and the credit card companies are in a feeding frenzy to bring in as much money as they can right now. New consumer credit protection laws are phasing in, and in the coming months, credit card companies will not longer be able to raise interest rates on existing purchases or charge late payment fees.
Credit card companies are also terrified that more and more people will default on their debts, as is already happening. On the first quarter of 2009, Reuters reports, credit card debt increased 16.4%.
It is clear that many Americans are living on their credit cards. With rising unemployment, it is inevitable that the default rates will continue to climb. Bank of America has reported a 14.54 percent charge off rate—accounts the company does not expect to be paid—in August up from 13.81 percent the month before.
In a Big Brother-ish development, CNN recently reported that credit card companies are tracking spending habits. If you were a Sak’s Fifth Avenue customer and you recently started shopping at Wal-Mart, you could be penalized because the company fears you may be in financial trouble. You could be in an even bigger penalty phase if you start using your credit card at bars.
What doesn’t make sense is that the credit card companies are precipitating more defaults by raising their rates or minimum payments to unaffordable levels, for all practical purposes guaranteeing more defaults.
What should a consumer do?
I wish I could give you some easy answers, but there aren’t many
If necessary, accept the interest rate increase and the closure of your account. If you can, immediately apply for another credit card so your available credit doesn’t take a hit when the account closes.
While it’s important to your credit score to have a high amount of available credit, that doesn’t mean you have to use it. In fact, don’t use it!
Use your credit cards
This may seem paradoxical with what I just wrote, but you have to use your credit cards or you may lose them.
Keep track of your cards and be sure that you use each one just twice a year Fill up your tank with gas or buy yourself a modest lunch. Pay off the bill at the end of the month. Many companies are now closing inactive accounts. If this happens to you, it can effect your credit score.
What’s next?
The CARD Act protecting credit card customers is scheduled to take effect in February of 2010. However, there is now talk that the effective date may be pushed up to December 1, 2009 because legislators are so angry about the credit card companies’ draconian activities in the runup to the new restrictions.
Among the protections of the CARD Act are prohibitions of permanent interest rate increases for late payments, restrictions on increasing interest rates on existing balances and prohibiting the issuance of credit cards to anyone under 21 without a parent as co-signer.
I’ll be keeping you up to date on this in the coming weeks.
—Kathleen Barnes http://www.kathleenbarnes.com
If you want to get rid of your credit card debt and employ a debt settlement company for this task then I have a pertinent suggestion. Do not go immediately to just one debt settlement company but instead use a debt relief network that is associated with multiple reputable debt settlement companies. To qualify for inclusion in the debt relief network, the debt settlement company must prove a history of effectively reducing debt.