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While Federal Reserve Board action provides consumer credit relief and more intervention is likely to occur next year, the current implementation date for consumer assistance is July of 2010. Recent financial institution changes to credit practices present ongoing challenges. Understanding these four rules can help you avoid negative credit consequences.
Credit Card Rate Increase
Are you one of millions who has been card-jacked by a notice that raises your credit card interest rate from a single-digit level up to shockingly high double digits? Does this change feel more like loan sharking than respected financial institution practices?
If you don’t know what caused you to be targeted for a rate increase, you are not alone. Rates are being raised without a clear rationale. While you have the choice to “opt out” of any increase, the consequence is: you must close the account. When you close an account, it reduces your total available credit, which means your credit scores take a hit. Closing a card with a high limit can cause a significant drop in your credit ratings.
Rather than closing your account, pay off current charges, which will remain under the old interest rate. Then, use the card once a month for a purchase you could pay cash for. When the statement comes, pay it off. This keeps your account active, while you avoid paying high interest.
Monthly Percent of Available Credit
Have you kept your account balances below 50 percent of their limits, believing you will preserve your credit scores? Wise credit counsel has been: don’t allow your balances to exceed 50 percent of the limit on any account because balances over 50 percent start to cause credit score hits. The closer you get to maxing out an account, the greater the scoring penalty. To raise scores, I’ve told you to keep your balances below 30 percent. And to raise them rapidly, stay below 10 percent.
Financial professionals, who regularly pull credit reports, tell me they’re beginning to see scores diminish as a result of balances which exceed 30 percent of the limit. Pay down your credit card balances as quickly as possible. And err on the side of caution; keep you balances close to 10 percent of your limit.
Run It Up; Pay It Off
Do you use credit cards as a convenience and pay them off in full each month? Many of us prefer to not carry cash or a checkbook. Your accounts are now being analyzed based on an average daily use rate rather than on the balance that is carried over to the next billing cycle.
For convenience, consider using a debit card instead of a credit card. Or, if you’re earning miles or bonus points, add up your purchases at the end of each week and send payment. Online bill pay makes this a simple process. Sending incremental account payments through the month will reduce the amount billed on your invoice to a much smaller percent of your account limit.
Don’t Use It: You Lose It
Are your credit cards tucked away to be used only for an emergency? Most of us have some credit cards (often store accounts) that we never use. Some of us prefer to rarely use our credit cards. It’s our “just in case” mentality. Many of these low use and no use accounts are being cancelled by issuers as they clean up their books. You could end up without credit when you need it.
A notice that an account you rarely use has been closed might not concern you. However, this action can reap detrimental repercussions. First, you never want a creditor to close an account. It shows up on your credit history as “account closed by creditor,” as if there is a negative reason it was closed. And the cancellation will reduce your credit scores.
Go through your credit cards. Sort by ones you’ll keep to use and ones you’ll never use or don’t need. List all of your unneeded/unwanted accounts. Phone each of these businesses. Ask what your account limit is. Thank the customer service rep. List the amount. Do this for every account you don’t need. Add up the total amount of available credit in the accounts. This is the amount of credit you’ll be eliminating by cancelling the accounts. Apply for a major credit card with a limit equivalent to, or greater than, the total amount in those accounts. As soon as you receive the new account, use online capabilities or call the companies and cancel all of the unwanted accounts. Ask them to send you a letter confirming that you closed the account. Keep the letters.
You only need four active lines of credit to build an excellent credit history. These can include mortgages, car loans, student loans, credit cards, or any other accounts that report to the three major credit reporting agencies each month.
Every month: use the credit cards you have. Make small necessary purchases, such as groceries. Pay them off immediately. Keep your credit cards active with low balances. Use accounts to improve your credit score. Don’t succumb to debt that requires paying high interest rates.