Credit crunch may squeeze card users

Tue, November 11, 2008

With this financial crisis, what should credit cardholders with credit card debt expect to happen to their existing finance charges? Will it have a direct negative impact 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? -- Jeff

Dear Debt Adviser,

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. -- Virginia

Dear Jeff and Virginia,

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 may raise rates. If this happens, carrying a balance -- never a good idea -- may 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.

However, your score may be negatively impacted 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 or not 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.

I wouldn't be surprised to see a "fee" fee. This fee (my own creation) would be charged to offset the lender's cost of keeping track of all the fees they charge!

Please don't tell the bank about this one.

Higher standards for new credit card accounts. Expect your bank to act like a nervous cat if you ask them for some of their scarce credit or cash.

The irony of this? They gave away all their credit and cash all by themselves! However, you are the one who is viewed with suspicion. Consumers who have less than an excellent credit score may find it more difficult to qualify for a new credit card account.

What should you do? Well, when gas prices spiked, you drove less. Now is the time to use credit less and save more.

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 due to inactivity, ask if 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.

Source: http://www.scrippsnews.com/