High Interest Rate: No Small Change
This is a big week for the credit card industry--and the 78 percent of families who have cards.
Tomorrow, the Senate is scheduled to vote on a bill that would ban many industry practices that consumers have been complaining about for years such as arbitrary retroactive interest rates.
If approved, the changes would go into effect nine months after President Obama signs it into law. There’s a similar House bill being considered. That would go into effect 12 months after signing. Either way, it’ll be a while before anything changes. In the meantime, business will probably operate as usual. And lately, it’s been operating this way: Many card companies have been losing money, and they’ve been making up for it by increasing interest rates and fees and reducing credit lines.
I’ve talked to a few consumers who have had one or both of these actions taken against them even if they’ve made their payments on time. You have probably already received a letter from your card company notifying you of a rate change and giving you the option to accept or reject. If you reject, the card issuer usually lets you pay off the balance at the old rate but won’t allow you to charge anything else on it.
Often, borrowers get so angry when they have to choose between accepting the new rate or losing their charging privileges that they close down the account.
Don’t, said Adam Levin, former New Jersey Consumer Affairs Director and founder of Credit.com. Your credit score, which you have to keep healthy because it determines whether you can get any sort of loan like a mortgage, takes a hit if something called your credit utilization ratio is high. This is the proportion of the credit that is available to you that you actually use. If you’ve used too much, your score will suffer. “You always want to keep your eye on the available credit ball,” Levin said.
Other consumers start shopping around for balance transfer offers on other cards. That's dangerous, Levin said. When you apply for too many cards at the same time, you start looking like a risky borrower. “Don’t fall for every offer,” he said.
It’s important during times like these to pay attention to your credit score. Many card companies are scrutinizing all of their customers. If your credit score drops between now and when these new regulations go into effect, you might end up getting your limit cut or interest rate increased. The cost to you would be no small change.
Here are some tips to improving your credit score that I gathered from consumer advocates and from MyFico.com, which you should really check out. I also discussed this topic last week in an NPR interview that you can listen to at http://tr.im/lu9g.
Always pay your bills on time. If you’ve missed payments, however, catch up as soon as you can and stay current. The longer you pay your bills on time, the better your credit score.
Keep your balances low. The closer to being maxed out you are, the lower your score.
Don’t close unused credit cards. Many people do that thinking it will raise their score. It actually could lower it because the proportion of credit lines used affects your score.
Don’t open new cards too rapidly. You might be tempted to do that to increase your available credit. But such a move could make you look like a risky borrower.
Ask for help if you need it. If you are having trouble paying your credit cards, call your creditors and ask for a lower rate or other type of workout plan. Or go to a reputable credit counselor.
Adam Levin and I will chat more about the new credit card regulations today at 1 p.m. If you have questions, go to http://www.washingtonpost.com/wp-dyn/content/discussion/2009/05/15/DI2009051501289.html
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