Back in December, I told you all about how credit card firms were behaving badly. I also told you about steps that the government was taking to rein in abuses from the credit card companies.
You know, things like changing and extending late payment notices, eliminating double-billing cycles, ending universal defaults (where lenders can hike interest rates on one card because you were late paying another card) and even changing the physical look of credit card statements so consumers could actually understand them.
Excuse me? A break or two for credit card consumers? What a revolutionary concept.
But one item I wrote about—how card companies are sticking it to consumers by closing dormant accounts and slashing card limits to unsuspecting consumers—still bugs me.
First, having your card closed down or your credit limit reduced can a have serious, negative impact on your financial life. Specifically, it can slash your credit score, which I like to call my personal financial lifeline. And nobody, but nobody, messes with my financial lifeline. And nobody should mess with yours either.
Credit limits have a lot to do with your credit score. It gets kind of dicey but stay with me. Roughly 15% of your credit score is based on loan longevity, like how long you had a home equity loan or how long you had a credit card. An additional 30% of your credit score is based on the percentage of your credit limit actually used, according to the National Foundation for Credit Counseling. So if you had a credit card balance of $5,000 on a $20,000 line of credit, and your issuer cut your credit limit to $10,000, your credit limit, based on your $5,000 balance, just shot up from 25% to 50%. Credit report agencies like to see your credit limit under 30% or 35%. So anything higher can ding your credit score.
Don’t think having your card cut up, or having your credit limit slashed can’t happen to you. Bank of America (Stock Quote: BAC), Capital One (Stock Quote: COF), and J.P. Morgan Chase (Stock Quote: JPM) have all come out and said they are closing inactive accounts. And American Express (Stock Quote: AXP), Wells Fargo (Stock Quote: WFC), Citi (Stock Quote: C) and others have already begun hacking away at customer credit limits. If you’re a threat to profits, then trust me, you’re in your credit card company’s crosshairs.
Consequently, you need to take strong steps if your card company comes after you. Why? Because credit score companies don’t like it when your percentage of credit shoots up like that. They also don’t like it if your credit card company terminates your card if it has gone unused. All these things can have, as I’ve said, a detrimental impact on your credit score.
So what can you do?
Use your card – sparingly. For starters, if you have a dormant card that you haven’t used, use it and buy something small, but needed, like an oil change for your car or a co-pay from a doctor’s visit. Aim for anything $50 or below. Then put the card away until next month, where you’ll repeat the process. Be sure to pay your credit card bill when you get it – that will keep your credit limit from inching up to dangerous levels. Your account will remain active and out of the clutches, since you’ve used it, of your credit card company.
If you have multiple cards, use the oldest ones first. Credit card companies are aggressively going after inactive cards that have been dormant longest. Credit card companies hate keeping inactive accounts going – it costs them money on the administrative end to service dormant accounts, so they prefer to kill your card to save on expenses. If they can reduce their risk exposure in the process, and that’s a big deal with card issuers these days, so much the better. A bonus: that credit card you kept active for years, and with a low balance, is a big positive on your credit report. Having it terminated takes away one of your most powerful tools in your credit score arsenal.
Don’t wait too long. By law, credit card companies have to give you notice – usually 20 days – that they plan to shut down your account for inactivity. When you get the news, go back to tip #1 and use the card, thus ensuring it remains active.
Keep a close eye on your bill. I know, reading the fine print on your credit card bill is about as much fun as standing in the line at the DMV. But you have to do it. By keeping tabs on your credit card bill, you’ll always know your available credit limit. If you don’t have a bill, flip your card over and look for the customer service number. Call your card issuer and they’ll tell your credit limit. That’s your first defense in protecting your credit score if your card company decides to lower your limit.
Pay down your card balance, and your bills on time. Yeah, right . . . call me Captain Obvious. But any financial move you can make that reduces your card’s debt balance is a huge positive. Even an extra $25 each month added to your payment can make a big difference. Also, paying on time ensures that your card company won’t spring a late payment trap on you. That helps keep the direction of your credit limit on your terms, and those of your card company.
Just so you know, I don't like credit cards. Actually, they scare me. I have a debit card card from Chase and an American Express card where I pay my balance every month (I use the points I accumulate for gift cards for friends). I did have a Target card, but it was an unholy mess. They claimed I owed them money but it wasn't true. So I closed that sucker out, although I'm sure the situation played havoc on my credit score. To this day, I'm still furious about that. But I learned a good lesson - not to trust credit card companies. So the last time I had a big credit card bill was back in 1984, when I ran up $20,000 in expenses when I moved to New York City. I was so anxious about the bill that I paid off the debt as soon as I got my commission from Goldman Sachs. Even though I've accumulated enough wealth on Wall Street that I don't have to worry about credit card debts, it doesn't make them any less frightening.
So let's be serious about what's going on here. After all, credit card companies are serious about taking their frustrations out on you. They’re bleeding cash and having customers with inactive accounts and high limits hurts their balance sheets.
That doesn’t mean you have to sit there and take it. Fight back, Cramerica, by staying one step ahead of your card company, and by using those tips I gave you above.
—Brian O’Connell contributed to this story.