Credit card companies are reacting to the sour economy by putting the squeeze on their customers. Do anything to lower your credit score and you can expect to see your interest rate go up, your credit limit lowered, or both.
“Issuers today are much quicker to pull the trigger on their consumer with average or poor credit scores,” says Bill Hardekopf of LowCards.com. “They are trying to reduce their risk by taking a very hard look at customers who do not have good to excellent credit.”
To keep this from happening you need to pay all of your bills on time, pay more than the minimum on your monthly credit card statements, and keep a low balance on your accounts.
From the e-mail I get, there is a great deal of confusion about credit cards. Here are some answers to the most frequently asked questions.
How many credit cards should I have?
There’s no magic number. It all depends on how disciplined you are. Some people can handle a few credit cards, a couple of store charge cards and a gas card. For others, the temptation to overspend is too great.
“For most families, two credit cards are probably sufficient,” says Ruth Susswein, a credit card expert at Consumer Action. “One card is for general expenses and the other is for emergencies.”
The ad promised a great interest rate, but when I applied for the card my rate was much higher. What gives?
Only people with good to excellent credit scores – currently that means 720 and higher – will get those advertised rates. If you have a lower score, your application will be rejected or you’ll be offered a card with a higher interest rate.
Is there a law that says how long the grace period must be?
No. Some cards still give you 30 days to pay, but a grace period of 20 or 25 days is more common. And that can be changed at any time. Always check the due date when your statement arrives. In some cases, you may need to pay that bill as soon as you get it in order to avoid a late fee. Your card company is required to mail your monthly statement 14 days before the payment is due.
The interest rate on my card just went up for no apparent reason. What should I do?
If you have a good credit history and have paid your bills on time, contact the card company and ask them to lower the rate. “Call their bluff,” advises Curtis Arnold of CardRatings.com. “Tell them you’re not going to stand for this and threaten to take your business elsewhere. A lot of times you can get concessions.” If they refuse to budge, it’s time to look for another card.
The bank just lowered my credit limit. Can they do that?
Yes. And they don’t even need a good reason. All they have to do is give you 15 days written notice. That lower credit limit can have a dramatic impact on your credit score because it changes your debt-to-credit limit ratio. “It looks like you’re using more of your available credit,” notes Greg McBride, senior financial analyst at bankrate.com, “even though you didn’t put an extra dime on that card.” If this happens, contact the credit card company and try to get the limit raised.
Is there any downside to running up charges that come close to my credit limit, as long as I don’t go over it?
Yes. It could hurt your credit score, which could result in a higher interest rate. The lower you can keep your balances, the more it helps your credit score. Experts say you are asking for trouble if your balance exceeds 30% of your credit limit.
What is the best way to pay off the balances on multiple cards?
Make at least the minimum payments on all of your cards. Then pay whatever extra you can afford on the cards with the highest interest rates. Don’t assume you know the annual percentage rate on each card. Check your latest monthly statements. For various reasons, the interest rate could be higher than when you first got the card.
Should I cancel old credit cards that I no longer use?
No. It seems like the logical thing to do, but if you close old accounts you may lower your credit score. Two of the factors used to calculate that score are history (how long you’ve had credit) and debt-to-limit ratio (how much of your available credit is being used).
Closing an old account can shorten your credit history and increase your debt-to-limit ratio. Both will hurt your credit score.
“Leave them alone unless there is a compelling reason, like an annual fee, or a child who is a co-signer and might go on a spending spree,” says Gerri Detweiler, credit advisor for credit.com.
Here’s an important tip: use every card at least once a year to keep the account open. Banks don’t want inactive accounts and they are aggressively closing them.
Do I need to sign my credit card?
Yes. That card is not valid unless signed. Visa and MasterCard require a clerk who is handed an unsigned card to ask for picture ID and have the customer sign the card on the spot. Otherwise, the transaction should be refused.
A lot of people think they can reduce the risk of fraud by writing “See ID” or “Ask for ID” on the back of the card rather than signing it. This does not negate your responsibility to sign the card and it does not obligate the clerk to request ID.
How do I shop for a new card?
You can compare cards at Bankrate.com, CardRatings.com, Credit.com and LowCards.com. LowCards.com has a new interactive card index that lets you compare virtually every card in the country sorted by interest rate, annual fee, or grace period.