Credit card companies buckle down
Hard times are taking their toll on credit card terms, including lower limits and higher fees. Host Tess Vigeland asks columnist Liz Pulliam Weston how to avoid tougher terms.
Liz Pulliam Weston is an award-winning, nationally-syndicated personal finance columnist. (Liz Pulliam Weston)
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TEXT OF INTERVIEW
Tess Vigeland:For a lot of Americans, being underemployed is just one of many financial setbacks. Another is the credit card bill that keeps arriving in the mail -- not just the balance on it, but the new strings attached to it: Higher fees, higher interest rates, lower credit lines, all this at a time when consumers need that cushion and the economy needs them to spend.
Credit expert Liz Pulliam Weston is here with us and I have to ask, why are card companies doing this?
Liz Pulliam Weston: Banks need money and they're worried about risk, so they're trying to reduce their risk by raising interest rates and lowering rates on people they think are they greatest risks and also doing the same for people they think won't push back. And the reality is, most people won't push back. Even if they have good credit, they won't realize that they have an alternative. What they don't realize is if they have good credit scores, they don't have to live with it. They can push back. They can take their business elsewhere.
Vigeland: Is that the easiest way to do it? Just say, "OK bye-bye?"
Weston: Well, it's easiest to abandon them, yes, but you should at least try to push back. So if you have good credit, you want to gather some of the offers that you're probably still getting in the mail or go to CreditCards.com, Bankrate.com, see some of the competing offers, call your credit card company and say "Hey, look. I've got great credit" -- or good credit, whatever the case may be -- "I can take any one of these offers." If they don't give you what you want, then you threaten to close the account. You don't want to actually do that, because that could hurt your credit report, your credit scores, but you threaten to do that.
Vigeland: Let's talk about this notion of closing your accounts. We've had many people write in who have heard from Chase, from Citibank. What these folks are wondering is... one of the outs is that you can write back to the credit card company and say "I decline the new terms of my credit card." They basically freeze you where you're at, you have to pay off the credit card, and then they close your account. What are the down sides, what are the up sides to going ahead and closing an account?
Weston: Well, the obvious upside to closing that account is that you can typically preserve the rate and terms that you had. The downside is that closing an account cannot help your credit score and it may hurt it.
Vigeland: But if you're not planning to buy a home anytime in the near future or a car, should you be worried about your credit score?
Weston: Your credit score is actually involved in a lot more decisions just that whether you get credit and how much it costs, although it's key to that. In many states, insurers can use it to determine the premiums that you pay. Also having good credit can be important for getting an apartment and for jobs. A lot of employers want to look at your credit report to see how well you're doing. Now the credit limit issue and how many open accounts is going to matter much less to an employer than it might to a landlord or to a credit card company or other lender that's looking just at your score.
Vigeland: We've mentioned the drop in limits and higher interest rates. The other thing we've been hearing from listeners is their minimum payment amount has been hiked. It's not longer, say, 2 percent, 3 percent. It's going up to say 5 percent, where you are required to pay more on that credit card. I wonder if that's a good thing?
Weston: We're really going back to the old. That was the way it was in the '70s. If you had a credit card, your minimum payment was at least 5 percent and could be higher. That ensured that you were paying down the principal that you owned and here's the problem we have -- a lot of people that are paying just the minimums are already stretched to their limits. So I would say, if you're in a position where you're struggling to pay your minimums now, now is the time to talk to a legitimate credit counselor, because really, if you can't afford those minimums, you're in pretty deep trouble.
Vigeland: Liz Pulliam Weston is a personal finance columnist for MSN, a good friend of the show here. Also the author of "Your Credit Score," coming out -- third edition?
Weston: Third edition probably in February. That's what it looks like now.
Vigeland: Terrific. Well, thanks again for coming in.
Weston: Thank you Tess.
Comments
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From CO, 12/10/2008
You left out one important "upside" of closing a credit card account -- the thrill of saying "NO" to a predatory lender.
BOA recently started sending my bill late, so I would have a week or less to send the payment. I had perfect credit, then incurred late fees resulting from this predatory practice.
I called BOA to discuss and negotiate. With no negotiation or admission of fault on their side, I got a warm fuzzy feeling when I simply canceled the card. Since I pay off balances every month, it was easy for me. Perhaps they didn't lose much in losing me as a customer of 7+ years, but I felt good for standing up for my rights.
From Northampton, MA, 12/09/2008
You might also take a look at CardHub.com -- it helps you whittle down the credit card offers you would be accepted for, so you're not piling a lot of credit inquiries onto your credit history.
From Ridgefield, CT, 12/07/2008
Ms. Weston: you owe listeners a detailed explanation of how the act of closing a fully paid account could lower a credit score, and why this is legal.
From MD, 12/07/2008
What about identity theft? My financial advisor recommended canceling credit cards that I don't use, on the grounds that I don't pay attention to those accounts and wouldn't notice if somebody else was using my accounts illegally. I think unused credit cards should be closed to prevent identity theft.
From Colorado Springs, CO, 12/07/2008
We need to know how the credit score is calculated.
There should be a government standard for such a thing, and it should be transparent.
It does not make sense that if one is to terminate a credit card, and does not owe any debt on that card, their credit score MAY decrease.
Decades ago, high interest rates are the business of ILLEGAL loan SHARKS.
NOW WE HAVE LEGALIZED LOAN SHARKING OPERATIONS, i.e crdit card companies.
Why are the politicians not loking out for the common people. Do you notice that majority of the politicians are millionaires?
Again, I hope the Obama Administration can legislate a set of credit score formula so that it is transparent to everyone. that means everyone can use the formulas to calculate their own credit scores, assuming they have the appropriate information.
From White Plains, NY, 12/06/2008
Credit card companies are nothing but legalized loan sharks. The so called "FICO" scoring system is designed to keep you paying the banks and credit card companies, even as they raise rates to outrageous levels. After all, you must keep your FICO up, mustn't you?
They are screwing us good and now they want money from the taxpayers to boot! How digusting...
From Fort Collins, CO, 12/06/2008
At the very end of this segment, Tess said what about tearing up all you credit cards and never using them again--then laughed as if to say "just kidding", when actually this was the most sensible and appropriate advice in the entire segment. And if one were to take the advice and see a legitimate credit counsellor, such as Consumer Credit Couselling Service, that's exactly what they would strongly suggest. They also provide a debt management program which facilitates a way to get all of those cards paid off over time, thus maintaing a good credit report. It's too bad that the only time I heard that plan mentioned, it was framed as sort of a joke.
From Hamtramck, MI, 12/05/2008
I actually did one better.
American Express is instituting draconian rate increases on their credit cards. My American Express Blue APR rose from 7.49% to 11.49%, a more than 50% increase despite my excellent credit.
So not only did I write a letter to American Express, but I contacted Senator Carl Levin (D-MI), the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve requesting that they deny American Express any taxpayer-financed bailout.
AMEX is the worst offender: they increased their cardholders' credit lines to sky-high limits (mine is $20K), they shuttered their deposit-taking consumer bank (American Express Membership Banking) several years ago, and *now* they want to reverse course and become a "commercial bank."
No way. No how.
AMEX made deliberate business decisions to overexpose themselves to the consumer credit market, and now they're backpedaling.
AMEX has plenty of cash from their anti-trust settlement with Visa and MasterCard. They don't have to raise rates on their "cardmembers."
To make matters worse, their CEO, Kenneth Chenault, is now seeking employment at Citigroup.
One wonders what kind of golden parachute he will get in return...
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