What do you need to do? There are five new tricks to getting and managing credit in 2011, says Virginia Sullivan, vice president of consumer education at Bills.com.
1. Use it or lose it.
Got credit cards gathering dust in a drawer? Issuers have become aggressive about closing accounts or cutting spending limits when a consumer isn't using a card. That's not a problem if the card that's being cancelled or cut is relatively new or has an insignificant credit limit. But if it's your oldest card or the one that offers the most spending power, losing that card could not only limit your options, it could cut your credit score.
That's because the nation's most ubiquitous credit score -- the FICO -- gives you points for having a long history of paying your bills. Lose part of that history because your oldest card no longer shows up on your credit report, and it can trim your score. The less credit history you have, the more it hurts.
In addition, you get points for having a low debt-to-available credit limit, so losing a high-limit card can have a big impact on your score. Consider: If you have a total of $1,000 of credit card debt outstanding spread among two credit cards, one with a $1,000 limit and one with a $10,000 limit, your debt to available credit limit is low -- just 9%. That makes you look good in the FICO model. But if that $10,000 card is cancelled, your debt-to-available credit ratio soars to 100%. That makes you look overextended -- even though your actual debt hasn't changed a bit -- and slams your credit score.
The trick here: Prioritize your cards. Use the ones you don't want to lose.
2. No cash, no sale.
New credit regulations allow merchants to set a minimum purchase amount for credit card transactions. That's mainly because merchants pay a fee to process your credit card swipe. The minimum purchase threshold can't exceed $10 and does not apply to debit cards, says Sullivan.
Not all merchants set limits, but you should carry at least some cash in your wallet or a valid debit card just in case. Otherwise, you might have to buy a bunch of unneeded junk, just so you can charge that $1 bottle of water as you drive through the desert.
3. Card tinkering demands some shopping.
You may have done a great job of shopping for just the right cards -- the ones with the best rates, fees or rewards -- when you got them, but issuers have made vast changes in the past year that may make these cards less attractive. Almost every issuer has made some change from boosting interest rates and fees to revamping rewards programs. If you haven't shopped your credit cards lately, now is the time to see if they still meet your needs. You can compare rates, fees and rewards programs at credit shopping sites like LowCards.com and CreditCards.com.
4. Forgetful can spell regretful.
The CARD Act prohibits issuers from raising your rates on an existing balance -- unless you step out of line. Miss a few on-time payments and you not only get hit with a penalty fee -- usually $25 -- you could get hit with a penalty rate, too. That can raise the cost of paying off the card by hundreds, if not thousands, of dollars, Sullivan said. Make a point of always paying credit cards on time. If you're forgetful, set up automatic payments.
5. Consider the horror of minimums.
Have you taken a close look at your credit card statements lately? If so, you've probably noticed the box that tells you just how long it will take to pay off this debt if you make only the minimum payment. If you're a person who typically makes just minimum payments, this is a box worth studying.
Consider that it would take 138 months to pay off a 19% card by making only the minimum 3% -- $90 -- payment, according to CreditCards.com. That go-slow repayment cost you a stunning $2,782 in interest, which is almost as much as your original debt. But if you just boost your initial payment by $10 and pay $100 every month (even though the required minimum payment drops with your balance), you'll pay off the loan in 42 months and save more than $1,600 in interest.
Want to do the math with your own balances? Check out the cool payoff calculators at CreditCards.com.
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