Banks, Credit Cards and How They Are Affecting Your Credit Report
It's no secret that banks are taking action to reduce their risk of delinquencies and write-offs on credit card accounts. They are cutting limits (many times to the remaining balance owed on the account), closing open accounts that are used infrequently, and imposing severe penalties on cardholders whose payments are considered late. This isn't just happening to folks who have lost jobs, or are in other dire financial straits. It appears to be happening across the board, even to cardholders with high incomes, good job security and money in the bank. And who, by the way, make their payments on time or early, and for more than the "minimum payment due".
One result is the obvious inconvenience of having your credit limit cut or lost completely. And as frustrating as that may seem, the damage done to your credit report can make things a lot worse, especially when you realize the impact to your credit score is due entirely to the bank's action. Let's use an example of a credit card account with a $7000 limit. Let's say you owe a balance of $3200. You've never missed a payment or been late. Then you get the letter in the mail that reduces your credit limit to $3500. You've just lost half of your credit capacity. But that's not all. Your credit score is partially based on the ratio of available credit to the amount used. Before the reduction in limit, you were below 50% of the available credit. Now, you're over 90%. Can that lower your credit score? Absolutely. What if you pay down the balance to under 50% of the new limit? Is there any guarantee that the bank won't cut your available credit line again? None...and we know it because it happened to one of our clients. And while we've been talking about credit card accounts, the same situation holds true for home equity lines. We have several clients who have had their credit lines immediately suspended or reduced to the balance owed after they made a substantial payment to the principal amount due.
What about late payments? If your payment arrives after the payment date cutoff, you can find your interest rate on the remaining balance suddenly raised to anywhere from 26 to 36 percent. That's quite a jump when you may have been previously paying between 8 and 12 percent. And your reason for being late doesn't seem to matter. Let's say you were getting ready to take a vacation and knew a payment would be due while you were gone. Not wanting your payment to be late, you send it in early - a separate check in a separate envelope with a full explanation, including the account number, your name, address, etc. So what happens? If the early payment is received before the current payment cycle end date, the money is applied to the principle balance of the current cycle. And when the next payment cycle rolls around (the one you sent an early payment for), the bank marks your account delinquent, activates the penalty interest rates and sends you a late notice, because as far as they are concerned, unless the correct payment is received during the payment cycle window when it is due, it was late. The lesson here is never try to send in a credit card payment early. The credit card payment processing center has no way to receive, acknowledge, or credit an early payment to the account.
So what's the answer? The so-called "money experts" are about evenly split on what to do to protect your buying power and credit report. Half say that all debt is bad in the current economic situation and should be paid off as quickly as possible. The other half recommend minimum payments to credit card accounts and home equity lines while putting every extra dime into a savings account. The logic of the second half may make more sense as savings may provide a financial buffer in the event of job loss or other economic problem. Bottom line, having cash in the bank is a better defense against the unknown than open credit lines that could be reduced or eliminated tomorrow.
Posted at 03:35PM Jul 17, 2009 by Jill Reid in General |
