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Q. With this financial crisis, what should credit card holders with credit card debt expect to happen to their existing finance charges? Will it have a direct negative effect on finance charges (e.g., raise the charges)? Finally, if the finance charges are sure to rise, is there any way to tell by how much?
Q. I’m trying to pay off my credit cards and keep my good FICO score. I stopped using my credit card and received a letter informing me that my account was being closed due to my inactivity. Can they do that if I have a good credit score? Also, will this affect my credit history and my FICO score? What should I do? Write to them and ask to keep the account open? Please advise.
A. I wanted to answer your questions together because millions of credit-crunched Americans have similar queries. Here’s my take.
We are in a tight credit cycle, or credit crunch. This means there is not as much credit available. Why? Because the banks put much of their money in mortgages and are getting very little back.
So, with less cash available, creditors are making decisions regarding how they will divvy up their cash. As part of that process, they also are deciding how they can make the most money while issuing less credit to fewer people.
So, here are some actions you may see from credit card lenders during this tight credit cycle:
•Lowering existing credit limits on open accounts. Lenders can limit their loss potential by issuing less credit. This allows a creditor with scarce cash or credit to offer credit to lower-risk people who can afford to pay both principal and interest.
If your credit limit is lowered, you end up with less credit available. For those who carry a balance, this increases the “debt to available credit” ratio. A higher ratio may negatively affect a credit score.
•Raising interest rates. Lenders need revenue, so they might raise rates. If this happens, carrying a balance – never a good idea – will cost more. For those having trouble making minimum payments, this can be a disaster.
•Closing inactive accounts. This reduces the lender’s amount of credit outstanding. If a lender closes your account for lack of activity, you will not receive an adverse mark on a credit report. This is because the account was not closed for “cause” by the creditor.
But your score might be negatively affected temporarily, depending on several factors, including the diversity of your credit (car, home, retail, installment), length of time you have been using credit, and whether the closed account is one of your oldest accounts.
•Fees, fees and more fees. Banks need more income, and credit is scarce. So, look for fees to be added to everything: annual fees, balance transfer fees, overlimit fees, late fees, risk fees, etc.
•Higher standards for new credit card accounts. Expect your bank to act like a nervous cat if you ask for some of its scarce credit or cash. The irony of this? Banks gave away all their credit and cash all by themselves. But you are the one being viewed with suspicion. Consumers who have less than an excellent credit score might find it more difficult to qualify for a credit card account.
Be vigilant. Watch your mail – any changes to your current credit card accounts will come in the form of a letter from your creditor.
If your creditor is closing an account because of inactivity, ask whether the account will remain open if you begin using the card again. Then, charge a small amount each month and pay it off when the bill arrives.
If you get a notice that your fees and interest are going up, be a smart shopper and take your business elsewhere. Or start using cash again. It’s an amazing and even empowering feeling to handle greenbacks instead of plastic.
Plus, when the bucks are all gone, you’ll know that it’s time to act like Elvis and leave the building.
