Credit card companies are tightening their belts – and that may lower your credit score. Over $21 billion in credit card debt was written off last year, and the industry is expecting another $55 billion in losses over the next year and a half. The banks are afraid that the increasing number of layoffs around the country will affect customers’ financial stability, and the extent of the mortgage turmoil could turn into a credit card meltdown quickly. This has led firms like American Express and Bank of America to heighten their lending standards, which includes lowering credit lines and increasing rates.
Such turnaround has already affected most American households. First off, lowered credit limits have negative consequences on your credit score, no matter what the reason behind it is. Secondly, if you carry a balance a lowered limit could reflect a higher credit utilization rate – a factor that indicates how close your balance is to available credit. That can negatively affect up to 33% of your credit score. Thirdly, raising interest rates will increase your debt burden. As a result, it will raise your debt-to-income ratio, which is another important factor relevant to your creditworthiness.
There are steps you can take to protect your score. Ameri-Financial senior analyst Sean Levin advises three things that consumers can do to protect their credit standing during this tightening environment. ‘Lowering your balances as quickly as possible, looking for mandatory disclosures that credit card issuers must provide to card holders, and checking your credit report periodically are things that matter today more than anytime else’, he says. Levin also suggests looking around for more attractive cards if your rate has been slashed. ‘Remember that credit cards shouldn’t be used as a primary source of funds. If you don’t need to extend your credit, don’t do it!”, says Levin.
Last summer, according to a Federal Reserve survey, approximately 65% of domestic banks reported tightening their lending standards. However, there is one perceived benefit to tightening standards: consumers have received roughly 13 fewer direct mail offers since an industry peak in 2005, dropping to a modest 8.4 billion pieces – the lowest level since the bottom in 2004. About
The Author...
Jack Sarkissian is a senior financial analyst at Ameri-Financial. Visit http://www.ameri-financial.com/ for news and updates on personal finance that you can not afford to miss. Use our free online tools to establish your financial goals and reach them faster, www.ameri-financial.com/finance-test/personal-finance-test.html.
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