Economic Turmoil Causing Credit Card Changes
The economy’s roller coaster ride has left most Americans wondering how the recent events will affect their personal financial situation.
One of the biggest questions is if the recent failures of major financial institutions and government bailouts will change their credit card rate and terms. While it is difficult to predict if the bailouts will be successful and save the economy, experts say we can reasonably predict that this recent financial earthquake is going to shake up the easy and generous lending practices of banks and lenders. As fear and uncertainty hit the market, lenders are much more cautious about lending to both businesses and consumers. That easy credit will not be available for as many borrowers. Lenders are now focused on limiting their risk and protecting themselves.
These changes could lead to increases in an individual’s APR rates or a decrease in his or her credit limit.
The Federal Reserve has kept interest rates low and the attractive APR rates that we have seen advertised are still out there, but issuers seem to be approving fewer consumers at this attractive rate. It appears the issuers are tightening up on how they classify a consumer’s risk factor and this results in the issuer approving fewer people at that attractive rate and more at a higher APR.
In addition, if you do anything that decreases your credit score, this can signal that you are a higher credit risk to the issuer. When you increase your risk factor, issuers are now more likely and quicker to increase your APR.
Credit card limits may be the component that is even more affected. Banks seem to be lowering the credit limits on cards for those with less than excellent credit. Banks may feel this is a way to protect themselves against cardholders who have taken on too much debt and have increased the risk of defaulting on a loan.
Issuers do seem to be lowering credit limits on certain customers to cut their risk. The lowering credit limits seem to be particularly affecting customers with fair to poor credit, not necessarily with customers with excellent or good credit.
An issuer could decrease a person’s credit limit for a number of reasons, including a drop in credit score, a late payment, or even carrying a balance that is too close to the limit.
Experts give these tips on how consumers can protect your credit limit:
* Keep your balances at less than 30% of your limit. According to a recent credit card survey by Consumer Action, 51% of those surveyed had at least one credit card with a limit about $10,000. If your limit is $10,000 and you must carry a balance, keep your balance under $3,000 for that card.
* Improve your credit score. A drop in your credit score can cause a drop in your credit limit. A FICO score of 720 or above is generally considered a good score.
* If your issuer lowers your credit limit, they will notify you by mail. This notice can be included in your monthly statement or it could come in an unmarked, white envelope that makes it easy to miss and toss out as junk mail. However, if your limit drops and you don’t realize it, you could unknowingly go over your limit, which will cause not only a fee, but a drop in your credit score and the possibility of your rate increasing to the default rate of about 30%.
* Most issuers now accept your card for payment, even if it puts you over your credit limit. Set an online credit alert to notify you when you get close to your limit.
* If you have a good credit score, a good payment history, and a low debt ratio, but the issuer increases your limit, call and nicely question this. Tell them you are a good customer and would like them to restore your credit limit.
* If your limit is lowered and your balance is close to your limit, transfer part of your balance to a credit card with 0% APR for 12 months for balance transfers. Do not use this card for purchases. Just use this introductory rate as a chance to pay off your debt as quickly as possible.