It’s no wonder credit card issuers are feeling skittish about risky borrowers. With cardholder delinquency and debt increasing amid a housing and employment decline, issuers are eager to limit their risk exposure
“I think the standards have been tightened and I think that credit card issuers are quicker to change — i.e., increase — your rates,” says Bill Hardekopf, CEO of LowCards.com.
There’s good reason for issuers to be jumpy. “Generally in normal times, if you look at the hierarchy of what gets paid, it’s credit cards that tend to be the last thing if the going gets rough,” says John Ulzheimer, president of consumer educational services at Credit.com. Consumers first worry about housing, auto loans, utilities and telephone bills.
He says issuers will still offer new credit and make attractive offers, “but you really have to deserve it. The days of just giving someone a platinum credit card seems to be not necessarily gone, but is just being put on hold for quite some time.”
At the moment, issuers are also trying to “whittle out” some of the riskier customers and replace them with lower-risk borrowers, he says.
They determine the riskier subset by monitoring existing accounts. They look at the performance on the accounts at that institution using internal risk scores, as well as the person’s credit scores. A spike in risk could result in an interest rate increase, credit line reduction or freezing, or even a closed account. Inactive cards may get closed or not renewed.
This is one time where change isn’t a good thing. Issuers will scrutinize suspicious changes in behavior. “Essentially it’s things like: Are they paying the minimum payment when they always used to pay the balance in full, do they miss a payment, are they going or getting close to their credit limit?” says Dennis C. Moroney, a research director at TowerGroup, a research and advisory services firm.
Unfortunately, financial pressures also matter. According to the new 2008 Credit Card Survey from Consumer Action, three out of the top 10 credit card issuers said “market conditions,” “the economy” and “business strategies” could trigger a rate increase.
“I think out of your control are any business decisions that they make on a blanket level in regards to the fact that they’re doing poorly as publicly-owned companies or anything along those lines. Those are what we call the market conditions-type of repricing,” says Linda Sherry, spokeswoman for Consumer Action, a national consumer education and advocacy nonprofit.
“What can you control? You can definitely control whether you don’t pay late, whether your payment gets there on time,” Sherry says. Overall credit management ranks high up in importance, too, she notes.
Risky borrowers with huge outstanding balances might find their credit limit reduced in the worst way — lowering it to match the balance, and continuing to lower it to the new balance as you pay it off. This punitive move trashes your credit score, and is meant to get huge balances down or sometimes, to get rid of you as a cardholder.
Your best bet is to pay down balances as much as possible so that any negative changes cause minimal financial impact. Beyond that, avoid giving your issuers an excuse to jack your interest rate, zap your credit line or close your account.
How to protect your credit card accounts
Issuers may have an itchy trigger finger when it comes to penalizing risky borrowers, but they’re not out to alienate all their cardholders. Folks with great credit who remain consistent stand the best chance of not experiencing negative terms changes if they keep up the good work.
“The folks who are, unfortunately, going through these types of experiences with default rates, lower credit limits, higher interest rates, issuers closing accounts down on them, suspending HELOCs — these are generally reserved for people who either are on the riskier side of prime or are just flat-out nonprime, and the lender just doesn’t want to do business with them anymore,” says Ulzheimer.
Try to stay in the good graces of your creditors by keeping your accounts active, paying down balances and maintaining great credit scores above 700. Heed these other tips to stay in the clear.
1. Verify the status quo
“Step one is to make sure that you do, in fact, still have the same terms that you had originally,” says Ulzheimer. Check not only the interest rate on your account, he says, but the credit limit and the grace period. Issuers sometimes shorten grace periods on accounts that aren’t generating much revenue.
2. Avoid ‘atypical’ activity
Consumers spend in patterns, so any atypical moves could cause a drop in your credit score and attract scrutiny from your issuer, Ulzheimer cautions. “You don’t want to all of a sudden start revolving a balance just for the heck of it because you want to put more money toward your 401(k) or put more money toward other investments or stick more money in savings. If you have the ability to continue to pay in full, it’s probably a good idea to continue to do so.”
Ditto multiple balance transfers and credit application sprees. Like someone passing a police car, you don’t want to do anything that looks suspicious.
3. Keep up the good payment history
Always pay on time, keep balances low and pay them off every month, if possible. The higher your balances, the riskier you look.
Charging more than a third of your credit limit could “raise the eyebrows” of the credit card company, notes Hardekopf. Keeping balances below 30 percent of the credit limit — even if you pay your balances off every month — will help you stay under the radar.
4. Don’t neglect other bills
Utility companies and other service providers sometimes report payment information to the credit-reporting companies, says Steven Katz, director of consumer communications for TransUnion’s TrueCredit.com. An unpaid medical bill, for example, could wind up as a derogatory item on your credit report, bringing down your credit score.
5. Check your credit reports
Make sure your credit reports contain accurate information, because inaccurate, derogatory marks could damage your credit scores. Pull a different report every four months from one of the three major credit-reporting agencies by going to www.annualcreditreport.com. You’re entitled to a free credit report from each bureau every 12 months.
6. Plan ahead if missing a payment
If you know you’re going to miss a payment, don’t wait for a collector to call about the delinquent debt. Contact your issuer in advance to see if you can work out a payment plan.
Hardekopf advises calling your issuer to explain why you’re going to miss a payment. Emphasize your good payment history and say that while you don’t want to see your interest rate skyrocket, you aren’t trying to skip out on the bill. Ask if a payment plan could be arranged.
7. Read ‘junk mail’ from your issuers
People who don’t open correspondence from their issuers may get rude surprises. According to the Truth in Lending Act, an issuer has to give only 15 days’ advance written notice before taking an adverse action — an undesirable change to the terms of your card agreement.
Your acceptance of the terms change could come in the form of continued use of the card — known as “debit ratification” — or by failing to notify the creditor of your disapproval. Read the notice carefully to find out if you can opt out of the new terms. Your only choice might be to close the account if you refuse the changes.
Ignorance of a terms change could have disastrous effects. You could be one new furniture set away from exceeding your limit because you didn’t realize it had been reduced. Going over your limit could wreck your credit score, result in an over-the-limit fee, and possibly, an increased APR if done a second time.
Read anything that comes from your issuer, and if you pay your bills online, set up e-mail alerts that will notify you when you get close to your credit limit.
