Following a series of shuddering changes in the economy, credit card companies have gotten tough in dealing with consumers. For years, lenders thrived on credit card customers who couldn't make payments on time, and companies reeled in late payment penalties and interest charges. But too many consumers defaulted on their debt, and now credit card companies are playing rough.
Even consumers who have good credit scores or who pay on time may face startling news under the first of many sweeping policy changes made by credit card companies in response to government regulations. New lender's behaviors will swing into effect in February 2010, when the first provisions of the government's Credit Card Accountability, Responsibility and Disclosure Act roll into law.
Get Ready for Sudden Account Closures
The Credit Card Act requires that your lender inform you within 45 days of any policy terms and changes, and many borrowers have already witnessed sudden shifts in rising interest rates and shrinking credit lines. While many Americans have maintained solid credit ratings through the economic slump, credit reporting agencies discovered a six-point drop in scores over the first three quarters of 2009.
That means that even good credit customers with years of brand loyalty are being jettisoned by banks and other lenders who are scrambling to regain equilibrium. They're canceling accounts and letting customers know after the fact. Imagine making a purchase and being informed by the register clerk that your card has been declined!
Consumers Dazed and Outraged
Organizations like The New York Times, The Wall Street Journal, and ABC News have all published stories of stunned consumers who had maintained good credit yet found themselves shipwrecked on a dead piece of plastic, without hope at a restaurant, hotel front desk, airport terminal, or cash machine.
The very act of canceling your credit card without notice can send a ripple across your life as you find:
- Your "credit utilization" number--a detail that shows how much credit you've used or still have available--is popped towards the high end, informing lenders and weakening your credit score.
- Your insurance premiums suddenly leap, responding to the risk of a credit score turned suddenly downwards.
- Your failed transactions created by cancellation spark immediate penalties and fees.
Even if you've been diligent and worked hard to establish and maintain solid credit, you can fall prey to the latest tactics of credit card companies. Burned up? You should be!
Consumers Fight Back
First, let's look at some likely scenarios for the new year when the act takes full effect. Credit card companies will probably raise interest rates when consumers try to shift their balances to another card. Your lender may also reduce your credit line.
Credit cards that once were free to own may now begin charging annual fees. Owners of reward cards, prepare for charges. Another adjustment may mean banks will scrap grace periods of 20-25 days they currently offer consumers in which to retire the balance before interest rates apply. More reasons for consumer outrage.
If you hope to fight back, you'll have to change your way of handling credit. The companies are changing, and so should you. To wit:
- Become Aggressive in Retiring Balances. You'll have a better chance of fighting the high utilization stigma by keeping your utilization at 30 percent or lower. Banks may fight back by lowering your credit line, but you'll keep your card.
- Create and Maintain a Healthy Emergency Find. Get back to savings. Hold sufficient cash in case you need it for a unexpected medical costs, a home or car repair, or an emergency flight to visit a family member.
- Have a Backup Credit Card. Shop around for a new card with low interest rates and no annual fees to use if your existing card is suddenly cancelled. Remember to use your backup at least once every six months, even if you pay it down immediately. Credit card companies may pick off unused, dormant cards like ducks in a row.
- Monitor the Credit Bureaus. All three of America's manor credit reporting agencies allow you to receive a free report on your credit scores each year. Websites like AnnualCreditReport.com can facilitate processing. You may not need all the for-fee services charged by some credit reporting businesses, but having a simple notification service that pings you about any and all sudden changes can be worthwhile, especially if you're applying for new credit from other lenders.
Account Closed? Now What?
You're not powerless and you're not alone. Many American consumers are already outraged by their credit card company's behavior. Do what most consumers do when they're mistreated: take your business elsewhere. If it was your primary banking institution that closed your card without notice, withdraw your funds and open an account elsewhere.
Search around for consumer-friendly lenders like credit unions or larger community banks with a history of good-consumer relations, such as Simmons Bank or USAA. But before you go, write about your outrage to the president of your current credit card company and contact your local consumer protection agency or better business bureau.�� Call or write your local and state legislators.�� Find out which representatives have posts in banking or financial institution committees.
Despite their inconsiderate treatment of loyal customers, banks and lenders are responsive to a poor public image. ��Organize visits to their headquarters or to offices of legislators.
Correction, Jan. 17, 2012: According to John Ulzheimer, president of consumer education at SmartCredit.com and an expert on the FICO score, the ideal percentage of credit utilization is not 30 percent, but from 1 to 10 percent.