If you breathed a deep sigh of relief, believing you escaped financial fireworks set off by the mortgage madness, that relaxing exhale might have been premature. Chances are you will soon be receiving fat envelopes from your credit card companies containing important changes to interest rates, fees, grace periods, and limits.
Why? The same banks that issue the most credit cards rank among the highest volume lenders of adjustable rate mortgages, also called ARMs. These loans typically start with low monthly payments and then reset higher — sometimes much higher — between two and five years later. As you’ve probably read, a growing number of borrowers are finding it impossible to pay the reset cost of these mortgages. Banks are experiencing an increase in delinquent accounts and foreclosures. They are beginning to lose money and are taking some of the following actions:
- Increasing interest rates. You may see minor changes with interest rates rising only a couple of percentage points. Or you could be offered a new variable rate account with interest changing monthly. But watch out for this killer: a spike interest (up to 34 percent) if a customer makes one late payment on any credit account.
- Higher late fees and over-limit fees. Because every credit card company is different, it’s essential that you read the tiny, boring print explaining your fees. Be certain you know how to prevent these unnecessary charges.
- Shorter grace periods. A grace period is the time between the date a monthly statement was prepared and the date the payment is due. For many years this was about 25 days. Recently, some lenders have been shortening this payment cycle. Beware of accounts with very short or no grace periods. You risk creating a history as a late payer, which will destroy your credit rating.
- Lowered credit limits and less frequent limit increases.
If you receive notification of account changes, your recourse is somewhat limited. You have the right to reject the change. This choice will probably require you to close your account. If it is an account you’ve used regularly and paid on time for the past six months or longer, you want to keep it open because your credit history makes up approximately 30 percent of your credit score.
Purchases that were made under the original account terms will be paid off under those same terms. You can accept the new account terms, pay off the existing balance under the old rules and stop using the account to carry a balance from month to month.
After the old balance is paid off, use the account once a month to make a very small purchase and pay it off immediately. The account will remain active. On your credit report it will reflect an ongoing responsible use of credit. Buying small items that use a tiny portion of your account limit and paying it in full each month means you won’t pay exorbitant new interest rates while you are taking action to raise your credit score.
If you must find an alternative to your current credit cards, an online financial data accumulator called Bankrate.com provides a no-cost service that allows consumers to compare credit card terms and availability nationally and by state. Unlike ad-sponsored sites, Bankrate attempts to provide accurate data for every reputable lender. If your credit scores are high, there are still zero percent introductory cards available, although many have shortened the initial low-interest period. Try to lock in the terms to follow the introductory period.
Bankrate negotiates interest rates and fees lower than those offered to the public by many banks. Be sure to mention that you’re looking at the Bankrate Web site when you speak with lenders so you get their lower rates.
Do not give anyone your social security number or personal information until you’re ready to open an account. A company with a social security number will check your credit. Each time your credit is checked, between 5 and 30 points get shaved off your credit rating. When you decide which account you prefer, call that bank back and complete the application as a Bankrate referral.
Tighter credit requirements will be with us into the foreseeable future. Now is the time to reduce debt, manage credit wisely, and actively plan for ongoing restrictions.