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Credit
Card Changes & Potential Impacts to Scores
In this economy Credit Scores
have changed dramatically. Now a 740 is a very good score and a 680 is just
average. Not too long ago a 680 and above was good and a 700 was excellent.
It is extremely important to keep abreast of the whirl wind of new
information and the subtleties of score vulnerability.
Creditors have been taking
aggressive steps to protect themselves from defaults on credit cards and
lines of credit. We have seen creditors acting on universal default where
you are penalized for being late by a completely different creditor. An
example of this would be late payments on a Macy’s account would give
Bank One Visa the motivation to close your Visa account. Credit limits are
now being decreased which could drive the scores down since your ratio of
balance to limit changes. Home Equity lines cancelled or reduced.Over draft
on checking accounts closed or diminished. Secured credit card products are
being discarded by Companies for fear of defaults.
Any and all of these changes
have significant effects on the credit scores. Every account that is closed
reduces the scores whether it is closed by the consumer or the credit
grantor. Reductions in variety of credit impact the scores since the health
of your portfolio (taking away a type of credit) diminishes.
Reducing limits changes the
balance ratios. If you had a $10,000.00 limit with a $3,000.00 balance you
would fall into the 30% range of balance to limit which would be fine. If
your limit is reduced to $4,000.00 before a closing and the bank pulls a
new report your score could drop over 40 points.
With universal default if you
were already late with one creditor and now another closes an account your
score drops further. The mortgage you are trying to refinance or the home
you are trying to buy becomes out of reach.
Revolving Credit is one of
the most important aspects of the Fico Scores health. Installment loans are
one set payment every month and there really is no management on the part
of the consumer other than making the payments on time. On the other hand
Revolving credit can be abused very easily with large charges on credit
cards reaching high balances or potentially exceeding the limits. This in
mind, the Fico score is more sensitive to this type of credit since it
creates a more accurate view of the credit holders abilities.
There will be big changes
in credit card rules in 2010. Here is a list:
1. Issuers will keep a fixed
interest rate on new purchases for the first year of opening a card and
increase rates afterward but they must give 45 days' notice. At present the
rule allows rate changes at any time for any reason, with only 15 days'
notice.
2. Reduce interest rate hikes
on existing credit card balances.
3. Stop the practice of
Universal Default. This is the ability for creditors' to increase their interest
rate on a credit card that has always been current just because of a late
payment on an entirely different item of credit a consumer has.
4. Give credit card holders
at least 21 days to pay their monthly payment.
5. Apply payments above the
minimum amount due, monthly, to the portion of balance with the highest
interest rates.
6. Clearer terms such as due
dates and times, year-to-date totals on interest and fees. Showing
consumers what the implication of making only the minimum payments on
credit card bills monthly will be.
Some of the pitfalls
of the rules will be:
No more zero percent credit
cards or balance transfer offers and we will see routine annual fees on
credit card accounts like we used to have.
There will be less subprime
credit cards which will hurt consumers trying to establish credit or a new
pattern of payment history after bankruptcy. We will see lower limits on
credit cards across the board and higher interest rates for all credit card
users no matter what your credit score or history is.
To protect your
clients, prospects, and yourself make sure to keep your balances low, use
all credit cards once a year at least, and don’t close any accounts.
Copyright
©2009 North Shore Advisory Inc.
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