Oh boy. Despite the new federal credit card regulations that are supposed to increase protections for consumers, it appears that the credit cards companies are still up to some of their old tricks. The new laws curtail practices like intentionally delayed late payment notices, double-billing cycles,raising interest rates on one card because of a late payment on a different card, etc.
Apparently in preparation for these new laws, which go into effect on July 1st, 2010, the credit card companies are aggressively closing accounts that aren't used often, and they are also reducing balances on existing cards at an alarming rate. At first, that doesn't sound so ominous, but read on for why this will hurt consumers, and how you can protect yourself.
The issue with closing out accounts and reducing credit limits is directly related to your credit score. According to an article at credit cards.com:
"30 percent of the credit score is based on the total amount of debt you have compared to your available credit."
What do you suppose happens when they close one of your accounts, or radically drop the available credit limit? Yep, since the available credit drops, but the total debt amount stays the same, your credit score goes down.
Say you had a credit card balance of $2,000 on a card with a $10,000 limit, and credit card company reduces your limit to $4,000. You just went from a 20% balance-to-limit ratio up to 50%. The credit reporting companies don't like to see anything above 35% or so, and now they may drop your credit score.
So, is there anything that can be done? Yes, there is:
- Make a few small purchases on those cards you haven't used in some time. If you have a credit card that you don't use often, make a small, but practical purchase with it. Something you were likely to spend anyway, like a grocery trip or gasoline purchase. Then repeat that once a month, but be sure to pay it off every month. Doing this at least once a month is key, as the credit card companies are looking for dormant months.
- Pay down the balances. Sure, they can drop the limits, but you can drop the current balance in response. This helps maintain that 35% balance to limit ratio that the credit reporting agencies are looking for.
- Read the fine print. The credit card companies are obligated to give you 20 days notice on an impending account closure or reduction in credit card limits. If you are paying attention to the fine print and attached notices in your bill, this gives you some time to react by either using the card and making it active, paying down the balance, or requesting a limit increase on another card and making a balance transfer.
- Request an increase in credit limit on a card you are happy with. The key here is to ask for the limit increase, but don't use it. And, only ask for one if you see that you are well above the 35% balance-to-limit ratio. It's better, of course, to just pay the balance down, but raising the limit can help in certain situations.
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