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Dear Debt Adviser,
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.
If you get a notice that your fees and interest are going up, be a smart shopper and take your business
elsewhere. Or, start using cash once again. It's an amazing and even empowering feeling to handle greenbacks instead
of plastic.
Plus, when the bucks are all gone, you'll know that it's time to act like Elvis and leave the building.
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