Shrinking Limits & Rising Rates: Credit Cards Are Not Your Friend
George Boelcke FCI
March 05, 2009
What a difference a year or so makes. Way back then, everybody who could sign their name was approved for almost any card they wanted. Today, rates for more than half of all cardholders have skyrocketed while interest rates are at their lowest levels in history. At the same time, mostly for very little reasons, credit limits keep being cut.
Just two years ago, our total credit limits exceeded $5 trillion. Those limits have already been reduced in significant ways and it is expected another $1.5 trillion in limits will be cut over the next year or eighteen months. That makes it highly unlikely any of us will escape without having one or more of our cards affected.
According to a report in the Wall Street Journal, JP Morgan Chase is one of the leaders of this trend. According to the company, in 2008 Chase decreased credit limits or closed accounts to the tune of almost $130 billion. They have also added a $10 monthly service charge for large balance holders for more than two years. Plus, many cardholders have had their minimum payment increase from two to five percent, not to mention a ton of additional fees and increased rates. But Chase is not alone, as the Federal Reserve reported that 45% of banks decreased credit limits just in the last quarter of 2008.
Unlike a fixed loan for a car or your home, credit cards are ours to use for one day at a time, thatīs it. Card issuers do have the right by law to close your credit card, increase your rate, and/or lower your credit limit. It isnīt fair, it isnīt necessary in most cases, it isnīt right to increase rates to creditworthy customers, but it is happening and wonīt stop anytime soon.
Whether it is investments or the housing market, getting approved for a loan, or changes with your credit cards, we are in a new reality. The "old days" are not coming back for a decade or more, if ever - sorry. Today, that becomes a significant pain and a huge adjustment for millions of people, along with massive rip offs in fees and interest.
But it really is short term pain for long-term gain. Credit cards are not your friend, they are not a substitute for income, and your emergency savings shouldnīt have a credit card logo on them. A year or two down the road, when you have the balances paid in full and have closed all but one of your credit cards, it will have been worth it to learn those lessons. Unfortunately, that just doesnīt help the unfairness, changing rules, and being trapped in huge interest rates, and shrinking limits right now.
There are some things you can do to minimize the chance of a credit limit decrease, or to protect your credit score:
Cut up all but one of your credit cards. You cannot use what you donīt have. Keep one card at home in case you need to book a car rental, airline ticket or hotel nothing else. Donīt make things worse than they already are.
Set yourself an amount below which you will pay by debit card or cash and never with a credit card. Gas, groceries or a restaurant bill should never be on your credit card. The debt lasts for years but the tank and fridge will be empty again next week. If everything under $30 or $40 is paid in cash, that alone will make a huge dent in your credit card balances.
Make a little above minimum payments, no matter what. The computers of your card issuer look for behavior patterns and anyone making the exact minimum payments, combined with a big balance, will show up on the radar screen of potential limit cuts.
Get serious about paying them off one at a time, starting with the lowest balance card. Make just above minimum payments on all the other ones, but the smallest one gets every dollar you can spare. Send in money at least every payday, and more often if you can. The payments get applied to the balance more often, more money, less interest. Keep it on the fridge and in your face until it is paid off.
Avoid cash advances on credit cards no matter what. Cash advances come with huge fees and interest. Card issuers see these as a red flag of trouble, or potential trouble. It is one of the primary triggers for potential rate increases and limit cuts.
If you wonīt cut up your cards or stop using them, do make sure the balances get to, or stay, below one-third of your limits. It not only boosts your credit score, but will likely keep you out of any possible limit cuts. Perhaps you can move your balances around to get there, but donīt kid yourself shuffling balances, or surfing over to a lower rate, doesnīt get anything paid off!
Never miss a payment. It is the quickest way to trigger a limit cut and will drop your credit score by up to 100 points. If your card is from the bank you deal with, ask them to set up a minimum payment by automatic debit from your account. You can always pay more and pay extra, but at least the minimum will be paid on time every time.
Around a third of your credit score is the total debt versus your total limits. So if you have a paid off card, keep it around until the rest of your cards are paid down or paid off. Then you can send it back and close the account. Until then, the magic formula of balances versus limits matters a lot. (Remember that limits and this calculation also include your HELOC or other lines of credit).
If you have a low-rate card, you will likely be "blackmailed" into choosing an increased 5% payment or a higher rate at your current payment. Card issuers want to get rid of you and your low rate. If possible, take the higher payment and keep the cool rate.
If you are investing or saving (other than matching 401(k) plans), consider redirecting this money to your credit card and debt. There is no savings account that will get you the same return as the interest youīll save on paying off your debt. Paying a 19% credit card in an average tax bracket is the same as getting a 25% return on your money!
Make your best effort. If you are not working, or just donīt have the money, your first priorities need to be food, shelter, your utilities and your family. Do a simple and realistic budget and spend whatever income you have in order of priority on your budget. That may, or may not, have money left over for your credit cards. But you cannot take care of them until you take care of yourself. Give them a call, tell them your circumstances, and know that your best is all you have.
Sometimes itīs darkest just before dawn. There will be times when you will feel overwhelmed and with that "whatīs the use" mindset. Stay optimistic and watch a whole lot less news coverage and a lot more music and sports channels.
Stay focused on becoming debt free and credit card independent. Yes, it will take focus and dedication. But itīll be worth it. Just think ahead two or three years when you have no balances on your cards. Add up all the money you are sending them each month and dream of what you can do with that money when youīre no longer sending it away for something you purchased years ago. Nothing worth having is easy but itīll be so worth it.
Just two years ago, our total credit limits exceeded $5 trillion. Those limits have already been reduced in significant ways and it is expected another $1.5 trillion in limits will be cut over the next year or eighteen months. That makes it highly unlikely any of us will escape without having one or more of our cards affected.
According to a report in the Wall Street Journal, JP Morgan Chase is one of the leaders of this trend. According to the company, in 2008 Chase decreased credit limits or closed accounts to the tune of almost $130 billion. They have also added a $10 monthly service charge for large balance holders for more than two years. Plus, many cardholders have had their minimum payment increase from two to five percent, not to mention a ton of additional fees and increased rates. But Chase is not alone, as the Federal Reserve reported that 45% of banks decreased credit limits just in the last quarter of 2008.
Unlike a fixed loan for a car or your home, credit cards are ours to use for one day at a time, thatīs it. Card issuers do have the right by law to close your credit card, increase your rate, and/or lower your credit limit. It isnīt fair, it isnīt necessary in most cases, it isnīt right to increase rates to creditworthy customers, but it is happening and wonīt stop anytime soon.
Whether it is investments or the housing market, getting approved for a loan, or changes with your credit cards, we are in a new reality. The "old days" are not coming back for a decade or more, if ever - sorry. Today, that becomes a significant pain and a huge adjustment for millions of people, along with massive rip offs in fees and interest.
But it really is short term pain for long-term gain. Credit cards are not your friend, they are not a substitute for income, and your emergency savings shouldnīt have a credit card logo on them. A year or two down the road, when you have the balances paid in full and have closed all but one of your credit cards, it will have been worth it to learn those lessons. Unfortunately, that just doesnīt help the unfairness, changing rules, and being trapped in huge interest rates, and shrinking limits right now.
There are some things you can do to minimize the chance of a credit limit decrease, or to protect your credit score:
Cut up all but one of your credit cards. You cannot use what you donīt have. Keep one card at home in case you need to book a car rental, airline ticket or hotel nothing else. Donīt make things worse than they already are.
Set yourself an amount below which you will pay by debit card or cash and never with a credit card. Gas, groceries or a restaurant bill should never be on your credit card. The debt lasts for years but the tank and fridge will be empty again next week. If everything under $30 or $40 is paid in cash, that alone will make a huge dent in your credit card balances.
Make a little above minimum payments, no matter what. The computers of your card issuer look for behavior patterns and anyone making the exact minimum payments, combined with a big balance, will show up on the radar screen of potential limit cuts.
Get serious about paying them off one at a time, starting with the lowest balance card. Make just above minimum payments on all the other ones, but the smallest one gets every dollar you can spare. Send in money at least every payday, and more often if you can. The payments get applied to the balance more often, more money, less interest. Keep it on the fridge and in your face until it is paid off.
Avoid cash advances on credit cards no matter what. Cash advances come with huge fees and interest. Card issuers see these as a red flag of trouble, or potential trouble. It is one of the primary triggers for potential rate increases and limit cuts.
If you wonīt cut up your cards or stop using them, do make sure the balances get to, or stay, below one-third of your limits. It not only boosts your credit score, but will likely keep you out of any possible limit cuts. Perhaps you can move your balances around to get there, but donīt kid yourself shuffling balances, or surfing over to a lower rate, doesnīt get anything paid off!
Never miss a payment. It is the quickest way to trigger a limit cut and will drop your credit score by up to 100 points. If your card is from the bank you deal with, ask them to set up a minimum payment by automatic debit from your account. You can always pay more and pay extra, but at least the minimum will be paid on time every time.
Around a third of your credit score is the total debt versus your total limits. So if you have a paid off card, keep it around until the rest of your cards are paid down or paid off. Then you can send it back and close the account. Until then, the magic formula of balances versus limits matters a lot. (Remember that limits and this calculation also include your HELOC or other lines of credit).
If you have a low-rate card, you will likely be "blackmailed" into choosing an increased 5% payment or a higher rate at your current payment. Card issuers want to get rid of you and your low rate. If possible, take the higher payment and keep the cool rate.
If you are investing or saving (other than matching 401(k) plans), consider redirecting this money to your credit card and debt. There is no savings account that will get you the same return as the interest youīll save on paying off your debt. Paying a 19% credit card in an average tax bracket is the same as getting a 25% return on your money!
Make your best effort. If you are not working, or just donīt have the money, your first priorities need to be food, shelter, your utilities and your family. Do a simple and realistic budget and spend whatever income you have in order of priority on your budget. That may, or may not, have money left over for your credit cards. But you cannot take care of them until you take care of yourself. Give them a call, tell them your circumstances, and know that your best is all you have.
Sometimes itīs darkest just before dawn. There will be times when you will feel overwhelmed and with that "whatīs the use" mindset. Stay optimistic and watch a whole lot less news coverage and a lot more music and sports channels.
Stay focused on becoming debt free and credit card independent. Yes, it will take focus and dedication. But itīll be worth it. Just think ahead two or three years when you have no balances on your cards. Add up all the money you are sending them each month and dream of what you can do with that money when youīre no longer sending it away for something you purchased years ago. Nothing worth having is easy but itīll be so worth it.
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