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We are all rightfully concerned about the way credit providers are behaving these days. Please read and save the below information for the days to come.
These rate increases are intended to reduce credit card companies' risk in the long-term and increase their gain in the short term. If you have a $20K line of credit with a credit card provider that is sitting mostly untapped, that represents risk to the company, even if you have sterling credit and perfect payment history. In this economy, credit card companies are aware that many will lose their employment and then perhaps turn to that untapped line to live on. If you don't have employment, you can't pay, and so the debt then becomes uncollectable.
By increasing interest rates, they achieve two things: 1) short-term monetary gain for those who are carrying balances and 2) customers with good credit and payment history becoming outraged and closing their accounts - which reduces the risk that those lines could be tapped for emergency purposes in the near or distant future. They are counting on and hoping that you will close the account in a fit of pique so that their risk is reduced! Or if you don't, they are hoping you will max the card out and increase their profit. Why do what they want? There are preventative measures you can take to maintain until this economy improves.
Credit limit decreases will likely come next after the ratejacks, if they haven't already. The years of easy credit are over, and consumers will consider themselves lucky to retain any of their current accounts unscathed.
I don't like it, I don't advocate it, but am just providing info that I've learned. My plan has been and continues to be to pay down all credit balances below 35% and then 'snowball' pay each card to a zero balance, with either the highest interest rate card or the smallest balance being paid to $0 first. Some of my accounts have had minor credit limit decreases, some have had interest rate increases, and some have remained untouched. My goal is to have $0 credit card debt by December 2009.
It's also VERY important to start socking away savings while paying off your credit debt - experts are recommending at least 8 months living expenses. It won't happen overnight if you start now, but if you are patient and do a little bit as you can, you will eventually get there.
It's important to note that if you want to retain the accounts you currently have, it's crucial that you never pay late, always pay at least 2-3X the minimum, and to use each card at least every 3 months. If you have a card that you haven't used in a while, put a utility payment or your next dinner out on the card, then pay it off next month after it reports with the small balance. Issuers are very reactive right now and are looking for any reason to reduce their risk. Don't give them a reason for adverse action on your account, and fly under the radar for the time being. Don't call them to complain about the ratejack if you want to keep the account. Don't request credit limit increases - this puts your account on the radar and they will go over it with a fine toothed comb looking for reasons to reduce their risk by closing, ratejacking or reducing the limit. Fly under the radar, people!
If you feel completely outraged by the ratejack, instead of closing the account - pay it off and make sure you pay off any future purchases in full. Don't charge more than you can comfortably pay off each month. If you don't carry a balance, the interest rate doesn't matter. You may still get a credit limit decrease, but at least you will retain the account and when the recovery eventually happens, you will be able to rebuild to achieve your original credit limit.
Closing credit cards reduces your average age of accounts, which affects your credit score. Additionally, it is already becoming much more difficult to obtain new credit and I foresee that getting even worse. So don't close the accounts thinking you will replace them with something else, because that will become more unlikely until the economy recovers.
Overall, best strategy: 1) Pay off all cards to $0 balance, no matter how long that takes. 2) At the same time, start saving with the goal of at least 8 months living expenses. 3) Be sure to use each card at least every three months and then pay them off the next month 4) Don't close any current cards unless you absolutely have to, as this hurts your credit score AND it will be difficult to replace them and 5) NEVER make a late payment and always pay 2-3X the minimum required payment.
It's a good idea to monitor your credit daily, weekly or monthly. If you have an AMEX, their Credit Secure monitoring service is about $12 a month and you can refresh your report daily to monitor changes, see that payments are reported correctly, and watch for fraudulent activity. True Credit through Transunion is a ripoff. Keep in mind that the scores they provide are not always indicative of your true FICO score, which is the main scoring system that most lenders use to determine your creditworthiness.
You can get one free credit report for each of the three main credit reporting agencies a year through annualcreditreport.com. That is the official site - freecreditreport.com is through Experian and you will be charged. It is important to get your free credit report at LEAST each year to make sure all your info is being reported correctly and that your identity hasn't been stolen. You can also obtain your FICO scores and reports for 2 of the 3 as often as you wish - they are $15 each for Transunion and Equifax. You can get them for a discount of $12.95 using the code CPPSAVINGS. I order them at least every 3 months, and sometimes every month. That is how I caught attempted identity theft in 2008 - well worth the $12.95. Experian has recently removed consumer access to their FICO scores, so the only way to see your so-called score on Experian is to buy their version from them, which isn't a true FICO. Still, by getting your free EX account each year and then supplementing it with a purchased EX report every 3-6 months, you can at least monitor it to make sure no fraudulent activity is taking place.
The best resources I've found if you want to learn more about either fixing your credit, improving your credit, or maintaining your credit rating are www.creditboards.com and the forums at www.myfico.com .
I went from having credit scores in the low 500s to the mid-700s in under 2 years by doing the above, reading at creditboards.com and finally applying some discipline in my credit behavior. We were broke, struggling and had crappy credit in early 2007. Now we have great credit and were able to refinance our home last December for an awesome rate that saved us $700+ a month. Poor credit will not be fixed fast, and it takes discipline and patience. We thought it was hopeless and that we would always have bad credit. YOU *can* change that! But if you are serious about maintaining or improving your finances in the coming days, you must start with being diligent about learning about your credit and maintaining it.
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