Good Lessons on Credit Cards

Back to school. Seems like summer just started and it’s time, once again, to make the trip to the store for all those school supplies, school clothes and basic necessities, basically a time when you give your credit cards a little more of a workout. Can buying certian items actually hurt your credit? Do the kinds of items we purchase really have any affect on our credit score? Unfortunately, yes…read on…

Credit card companies are feeling their own pain with the credit crunch. According to American Express and several other companies they are seeing more and more consumers falling behind on their credit card payments. They are also seeing much higher balances than before with people being driven to use their credit cards for paying some monthly bills. Their way of combating this though could hurt the average consumer.

One of the actions they are taking is to lower credit limits. Most of the time this is done without your knowledge. Credit card companies are supposed to notify cardholders 15 days in advance of making changes but a lot of the time this is only noted on your monthly statement in very small print that can be easily overlooked. Their feeling is that by lowering limits they can control cardholder risk by not giving them as much available credit.

The problem with this is that lowering your limit could make your balance to high credit ratio off kilter. This is something the credit card companies don’t explain. Let’s say for example that right now you have a limit of $10,000 on a card and a $5,000 balance. Your credit card company decides it’s in your best interest for you to not have so much available credit because you might use it so they lower your limit to $6,000. Now it looks like you are almost maxed out on your credit card, which can have an extremely negative impact on your FICO score.

Does what you buy determine your credit limit and interest rate? It can now. Along the same lines some credit card companies are actually paying attention to what you are buying with your credit card and either lowering your limits or raising your interest rates based on these purchases. Let’s say you are going through marriage counseling and you are paying the counselor with your credit card – your credit card company takes note of this and decides you might be at risk for a messy divorce. Based on that, they decide raise your interest to reduce their risk if you default or lower your credit limit so there is not as much temptation available to you. Or let’s say you stop on your way home every Friday to have a drink with co-workers before you go home, they will track your history of those charges and may decide you could indulge a bit too much – you might become a irresponsible and default on your credit card so they exercise their right to change their terms of service.

So what you can do about this? Keep your balances low. This way if your credit card limits do get lowered it won’t have the impact it would if you had high balances to begin with. If you do get a notification that they are lowering your limit, call them. See if you can reason with them not to. Limits are often lowered randomly so it does not hurt to call them and see if they will leave your limit alone. Try not to pay your monthly bills such as utilities, etc. with credit cards. This makes the credit card companies very nervous as to them it makes you look desperate and they could in turn take some measures that could hurt your credit score.

This all this sounds like “big brother” is watching…and in today’s financial climate they are. Back to school is a good time of year to take stock of the things you use your credit card for. Watch what you spend, watch where you spend and you will be fine. It’s never too late to learn!