May 2009 Newsletter

As credit card delinquency rates soar, credit card companies are continuing to raise interest rates, lower credit limits, and in some cases closing accounts on their best customers. Unfortunately, these actions can often damage your credit scores. And while credit card regulations are in the works, they aren’t expected to go into effect until July 2010. So what can you do in the meantime?

This month, we'll show you how to minimize the damage that can occur because of actions on the part of credit card companies. We’ll also give you tips on how to protect your credit scores in the process:

1. Interest Rate Hikes

While an interest rate hike doesn’t directly impact your credit scores, how you handle the hike can. Even though your first reaction might be to close the account and opt-out of the increase, you should think twice before doing so. Closing the account could backfire and actually lower your scores. From a credit-scoring perspective, it’s best to keep the account open and if you can afford to, pay off whatever balance you have on the account so that you avoid paying the interest charges. Even if you continue to use the card, as long as you pay the balance off each month you’ll avoid paying interest charges, so the interest rate won’t matter.

2. Credit Limit Cuts

A large portion of your credit scores are determined by the proportion of balances to your credit limits on your credit cards – often called the debt-to-limit ratio or revolving utilization percentage. The higher your utilization, the lower your score. When a credit card issuer reduces your credit limit, the change can increase your utilization percentage and lower your scores. The best way to minimize the impact of a credit limit reduction is to pay down your credit card debt and keep your balances as low as possible.

Want to see how a credit limit reduction might impact your score? Try using our free Credit Score Compass to estimate how changes in your credit limits can impact your score.

3. Account Closures

Account closures can occur for a number of reasons, but in most cases you’re more likely to experience an account closure if you have a recurring history of late payments, repeatedly go over the credit limit, or simply because you don’t use the account (inactivity). When an issuer closes an account, it closes off the available credit limit associated with that account. Just like credit limit reductions, an account closure can cause an increase in your revolving utilization and lower your credit scores. The best way to offset the damage is to make sure you have several credit cards open with very low balances to help cushion the blow of a potential card closure.

As we continue to battle our way through this economic recession, one thing is abundantly clear: Credit card usage in this country is changing. The best way to use credit cards in this day and age is to only charge what you can afford to pay back at the end of the month. By doing so, you’ll avoid paying interest charges and you won’t have to worry about credit limit reductions impacting your revolving utilization percentage because you won’t have the debt in the first place!

Have you been affected by unfair credit card practices? Share your story in Credit.com’s Community Forum.

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Quote of the Month

"Enjoy the little things, for one day you may look back and realize they were the big things." ~ Robert Brault