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Credit News
By Tracy Becker
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True or False?
FALSE! Opting out of credit
cards will HELP your credit score
ABSOLUTELY FALSE:
Credit card companies are informing credit card
holders that their interest rate will increase, an annual fee will be
assessed, or both of these changes will occur.
While a consumer's first instinct is to opt out of the card and take
a lower interest rate on the balance due, that action will cause
decreases in the score. I know this doesn't seem logical.
Consumers think if they pay the balance off at a lower rate for five
years, they will be saving money, and they believe it is the
smarter choice. But there are consequences that may cost them more
money in the future.
With the new credit card rules that went into effect in February
2010, when the opting out offer is given and the consumer chooses it,
the score will drop up to 60 points. Opting out means the card
will close, whether there is a balance or not. The closing of the account
is where the damage to the credit score occurs.
The score will drop up to 60 points and a line of revolving credit
will be lost. The credit score will be affected for at least a
year. If the consumer has minimal credit to begin with, their
credit score could be hurt indefinitely.
We are not accustomed to viewing credit as an investment portfolio,
but that is exactly what credit card holders need to do. Prior to
closing any accounts, the balance of the entire "portfolio"
should be considered.
The more credit someone has, and the different types of
credit one has, the higher the score and the more valuable the credit
portfolio becomes. We do see exceptions to this
rule one out of every 3,000 so it is best to follow the majority
rule. When credit is closed or inactive, it can be harmful to a
credit score.
Why? There is less transparency in viewing the
consumer's ability to manage varied credit. Less activity is
viewed as higher risk and the score drops. If old credit
is closed, it can be removed after two years of inactivity.
Old credit is
a treasure to the credit score. Once it drops
off you can lose up to 100 points depending on the whole portfolio of
credit.
There are other consequences of opting out of a credit card.
You need to consider when the balance will have to be paid
back. The new rules place a limit on when the balance needs to
be paid and demands that it be paid in up to five years.
For example, if a consumer owes $10,000.00 and they opt out, the
minimum payment will automatically be recalculated and will be spread
out over the five year period. The financial consequences
are that the consumer must be ready to pay a higher minimum payment,
if necessary. Therefore it is important to think all of these
ramifications through before taking the plunge and opting out. There could be more
negative outcome than positive in opting out or closing a credit card
in the majority of cases.
So remember, once a credit card is closed, whether opting out or just
closing the account, the credit score is going to drop. If the credit
card is reopened or a new card is applied for, the score will drop
even further. Opening new credit reduces the score up to 60
points as well.
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Why wait until the mortgage application
you are working on is denied because your customer accidentally reduced
their score?
Do you have enough information on credit and the scoring
systems?
Can you educate your clients with the information you
have?
NSA is offering a FREE TRAINING
PROGRAM
to professional organizations. We will educate your
management staff on credit, the unknown dangers of credit score
reduction and the ways to help your clients have peace of mind and get
the credit they need.
Contact NSA Today!
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Tracy
A. Becker
President
North
Shore Advisory, Inc.
155
White Plains Road
Suite
203
Tarrytown,
NY 10591
(914) 524-5014
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"Great credit brings great opportunity!!"
Copyright 2010
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