Credit Card Terms Taking Turns For Worse

The impact of ultra-tight credit markets is hitting your credit cards, and you might not even realize it.

On The Early Show Tuesday, financial contributor Vera Gibbons explained that lenders are tightening terms in numerous ways, and you need to be aware of all of them to avoid possible trouble down the road.

Behind the changes is the simple fact that lenders want to protect themselves from bad debt, so they're tightening standards and practices in hopes of avoiding defaults by credit card users.

What are they up to?

LOWER CREDIT LIMITS

This is the biggest and perhaps most ominous change of all -- and something many consumers won't realize has happened to them until it's too late. Here's what's scary: You don't have to "mess up" in order for a company to lower your credit limit. Big companies such as American Express, Bank of America and others say they can and will change terms at any time, based on market conditions and the economy in general. Any "perceived risk" can also lower your limit. That includes a decline in credit scores or late payments on other bills.

How much are credit limits being cut? In some cases, the cuts are big, Some companies are lowering the limit to right above your balance, and as the balance drops (meaning, as you pay off your debt), the credit limit drops, too. That makes it VERY easy to exceed your credit limit.

Credit card companies DO have to inform you that they're lowering your credit limit, but who really reads those small-print pamphlets that come in the mail? Consumers may not know their limit has dropped until they go over it and incur a large fee. Even worse than a fee, however, is how this affects your credit score. When a credit limit is lowered, it appears that you're using a much larger percentage of your available credit. That lowers your credit score, making it more difficult to obtain a mortgage, car loan, or even another credit card.

INACTIVE ACCOUNTS CANCELLED

Something else to keep your eye on: Banks are cancelling un-used -- and thereby, unprofitable -- accounts to eliminate the costs of maintaining those accounts. An inactive card can also be cancelled if your risk profile changes. That also hurts your credit score. Again, you may not realize this is happened. If you just have the card on hand "for emergencies," you're probably not paying any attention to it. But now, more than ever, you want to protect your credit score and keep it as high as possible.

FEWER CARD OFFERS

If you consider all those credit card offers in your mailbox, you'll be glad to hear that companies are sending out fewer solicitations. HSBC has sent out 54 percent fewer offers this year; Citibank, 45 percent fewer. But if you don't have great credit, that's bad news for you. When you get those offers in the mail, it means you've been pre-approved for a card. But if you have to search out cards and apply on your own it can, once again, lower your credit score. Plus, it's simply a pain in the neck, AND it's getting harder and harder to qualify for good cards. You may have to settle for one with a much higher interest rate.

FEWER ZERO-PERCENT OFFERS

Used to be that no-fee, zero-percent credit card offers were a dime a dozen. Carrying a lot of debt? Transfer to one of these cards for free, and pay zero percent interest for a year. Now, if you even qualify, the offers are more likely to be for six months. You're also likely to pay a balance transfer fee of 3 percent or more. If you're looking for a good zero-percent card offer (AND you have good credit), Chase and Discover still have a few deals.

NO SECOND CHANCES

Mess up once and that's it, you're out of luck. Banks won't hesitate to increase your interest rate or impose big fees if you pay late, etc. It used to be that if you were a good customer, you could call and basically apologize, explain your mistake, and ask that the fee be removed or your rate re-adjusted. But no longer. Card companies are holding firm to their punishments, and no amount of cajoling will change their minds.
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