Aug 28 2008
Some lessons we should all learn…
Back to school. Seems like summer just started and it’s time, once again, to make the trip to the store for all those school supplies. Can buying school supplies actually hurt your credit? Do the kinds of items we purchase really have any affect on our credit score? Read on….
Credit card companies are feeling their own pain with the credit crunch. According to American Express and several other companies they are seeing more and more consumers falling behind on their credit card payments. They are also seeing higher balances than before with people being driven to use their credit cards for paying some monthly bills. Their way of combating this though could hurt the average consumer.
One of the actions they are taking is lowering credit limits. And most of the time it is without your knowledge. Credit card companies are supposed to notify cardholders 15 days in advance of making changes, but often this is noted on your monthly statement in very small print that can be easily overlooked. Their feeling is that lowering limits is a way that they can control cardholder risk by not giving them as much available credit.
The problem with this is that lowering your limit could make your balance to high credit ratio off kilter. This is something the credit card companies don’t explain. Let’s say for example that right now you have a limit of $10000 on a card and a $5000 balance. Your credit card company decides it’s in your best interest for you to not have so much available credit because you might use it so they lower your limit to $6000. Now it looks like you are almost maxed out on your credit card, which can have an extremely negative impact on your FICO score.
Credit card companies that we know are initiating this practice are Washington Mutual, HSBC and Wells Fargo. According to the consulting firm Institutional Risk Analytics that helps monitor credit card activity there will be many other companies following in their footsteps.
Does what you buy determine your credit limit and interest rate? It can now. Along the same lines some credit card companies are actually paying attention to what you are buying with your credit card and either lowering your limits or raising your interest rates based on these purchases. Let’s say you are going through marriage counseling and you are paying the counselor with your credit card – your credit card company takes note of this and decides you might be at risk for a challenging divorce, so they decide to raise your interest rate to reduce their risk if you default or they lower your credit limit so there is not as much temptation available to you. Or let’s say you stop on your way home every Friday to have a drink with co-workers before you go home, they will track your history of those charges and may decide you could indulge a bit too much – you might become irresponsible and default on your credit card so they exercise their right to change their terms of service.
So what you can do about this? Keep your balances low. This way if your credit card limits do get lowered it won’t have the impact it would if you had high balances to begin with. If you do get a notification that they are lowering your limit, call them. See if you can reason with them not to. Limits are often lowered randomly so it does not hurt to call them and see if they will leave your limit alone. Try not to pay your monthly bills such as utilities, etc with credit cards. This makes the credit card companies very nervous as to them it makes you look desperate and they could, in turn, take some measures that could hurt your credit score.
I know all this sounds like “big brother” is watching…and in today’s financial climate they are. Watch what you spend, watch where you spend and you will be fine. It’s never to late to learn!
Mindy Leisure, mindy@advcredit.com, and Jim Kaiser, jim@advcredit.com
Advantage Credit Inc. of Colorado www.advcredit.com