Fed Report Shows Banks Tightening Lending Standards on Credit Cards
On Monday, the Federal Reserve released its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices.
The survey shows that banks have maintained their tight grip on credit card loans and are reducing credit limits. It also shows that more lenders continue to raise the minimum required credit scores on credit card accounts, making it more difficult for some consumers to be approved for credit cards.
Results of the survey include the following:
* Nearly 60 percent of survey respondents indicated that they had tightened lending standards on credit card loans, about the same proportion as in the January survey.
* Approximately 55% of the respondents reported having raised minimum required scores on credit card accounts over the previous three months. The report says this is a somewhat higher proportion than in the January survey.
* Approximately 65% indicated that they had lowered credit limits to either new or existing credit card customers, a very large increase over the 45% reported in the January survey.
Experts suggest that these numbers show how difficult it will be for applicants without good or excellent credit to be approved for a credit card. Despite political rhetoric and bills passing in congress, experts predict that credit card reform won’t happen until sometime in 2010. They say to prepare by taking care of credit scores, as one’s credit score can affect loan approvals and interest rates, especially now that banks are become more selective.
Advisers offer these tips for building a good credit score:
* Pay your bills on time. Late payments, the most common piece of negative information appearing on credit reports, are often responsible for significant drops in credit scores. Make at least the minimum payments on your credit cards and loans on time each month.
* Keep your accounts open, especially your oldest accounts because longevity with these long-standing accounts looks good on a credit report. In the past, experts have recommended closing newer, unused accounts; however, since issuers are reducing limits and closing accounts, experts are suggesting to keeps the accounts you have (even if unused). They say, for example, that it would be helpful to your credit score to occasionally put a charge on a rarely used card and then immediately pay it off. This can help your debt-to-credit-limit ratio, which in turn helps your credit score.
* Keep your debt-to-credit-limit ratio under 30%.
* Use your credit card at least once each month and pay it off in its entirety as soon as the bill arrives.
* Keep your bank record clean; an insufficient funds problem with your bank could show up on your credit report.
* If you have a good credit card, keep it. Maintaining a card and building a good payment history helps build your credit score. Creditors want you to have a long, dependable credit history.
* If you are just getting started, don’t open several new accounts all at once, because that will lower your average account age. Opening too many accounts during a short period looks risky even for the best borrower.
* Having a variety of loans that you pay on time each month, such as a mortgage or car loan, helps build your score. Get into the habit of paying all bills, including mortgage and utilities, before the due date.
* Pay off your balances; don’t continue to transfer them to another card or loan. If you are having trouble paying your bills, contact your creditors to work out a payment plan or see a legitimate credit counselor. This will help you manage your credit and improve your score over time. A good place to start is the National Foundation for Credit Counseling at http://www.nfcc.org.
* If you have past due accounts, pay off the one that is closest to being current first.