Back in December, I told you all about how credit card firms were behaving badly. I also told you about steps that the government was taking to rein in abuses from the credit card companies.
You know, things like changing and extending late payment notices, eliminating double-billing cycles, ending universal defaults (where lenders can hike interest rates on one card because you were late paying another card) and even changing the physical look of credit card statements so consumers could actually understand them.
Excuse me? A break or two for credit card consumers? What a revolutionary concept.
But one item I wrote about—how card companies are sticking it to consumers by closing dormant accounts and slashing card limits to unsuspecting consumers—still bugs me.
First, having your card closed down or your credit limit reduced can a have serious, negative impact on your financial life. Specifically, it can slash your credit score, which I like to call my personal financial lifeline. And nobody, but nobody, messes with my financial lifeline. And nobody should mess with yours either.
Credit limits have a lot to do with your credit score. It gets kind of dicey but stay with me. Roughly 15% of your credit score is based on loan longevity, like how long you had a home equity loan or how long you had a credit card. An additional 30% of your credit score is based on the percentage of your credit limit actually used, according to the National Foundation for Credit Counseling. So if you had a credit card balance of $5,000 on a $20,000 line of credit, and your issuer cut your credit limit to $10,000, your credit limit, based on your $5,000 balance, just shot up from 25% to 50%. Credit report agencies like to see your credit limit under 30% or 35%. So anything higher can ding your credit score.
Don’t think having your card cut up, or having your credit limit slashed can’t happen to you. Bank of America (Stock Quote: BAC), Capital One (Stock Quote: COF), and J.P. Morgan Chase (Stock Quote: JPM) have all come out and said they are closing inactive accounts. And American Express (Stock Quote: AXP), Wells Fargo (Stock Quote: WFC), Citi (Stock Quote: C) and others have already begun hacking away at customer credit limits. If you’re a threat to profits, then trust me, you’re in your credit card company’s crosshairs.