Friday, January 30, 2009

Economic Crisis Hits the Credit Card Industry

Have you recently had your credit card limit reduced or even had a credit card cancelled for no apparent reason? If so, you are not alone. In fact, according to a survey of senior loan officers conducted by the Federal Reserve in October, approximately 20% of banks had reduced the credit limits of their prime borrows while 60% had lowered the limits of their nonprime borrowers. Unfortunately, slashing your credit limit may have a worse impact on you and your finances than you originally thought.

Why Banks are Cutting Credit Limits

Thanks to our troubled economy, many banks are choosing to cut credit limits in an effort to reduce their financial risks. Since the current economic problems are causing an increase in consumer defaults on loans, credit card companies are closing inactive accounts and reducing the amount of money consumers can borrow. Unfortunately, the reduction in credit limits has only managed to worsen the current economic climate as consumers turn to other sources for paying their debts or simply stop paying on them altogether.

The Unexpected Negative Effects

Obviously, cutting credit limits and closing credit card accounts is bound to leave many consumers in a poor financial situation. In addition to reducing the funds that are available to them, however, cutting credit card limits and closing credit card accounts also has a negative effect on consumer credit scores.

According to experts, approximately 30% of your credit rating is determined by your credit to debt ratio. In other words, the more debt you have in comparison to the amount of credit you have available, the worse your credit score becomes. When a credit card cuts your credit limit down, this reduces the total amount of credit you have available. Since you are still carrying the same amount of debt, your credit to debt ratio looks far worse than it did before the credit line cut.

Those consumers whose credit cards are cancelled are also losing out on valuable credit history, as those credit cards are effectively dropped from their credit reports and no longer count toward their credit rating. Depending upon how long you have held the credit card and depending upon the other forms of credit you have in place, having a credit card cancelled can also be quite devastating in terms of your credit rating.

A Vicious Cycle

Unfortunately, cutting credit card limits and canceling credit cards has spurred a vicious cycle. As consumer credit ratings are negatively impacted by the credit card changes, they find it more difficult to obtain the loans they need to make it through these troubled times. In addition, as other credit card companies take a look at their credit reports, the recent changes can make them view the consumer as a high risk as well.

So, what can you do about it? Unfortunately, there isn’t a whole lot you can do other than wait it out. If you are concerned about having a card cancelled on you, however, you can make an effort to use it at least once per month so the credit card company will be less inclined to cancel a card that has not been getting any use.

About the Author: Shannon Kietzman is a well known author and trusted resource. Shannon regularly writes for . For more info and to order your credit report with FREE credit score please visit

Monday, January 26, 2009

Finding the Right Credit Card During a Tough Economy

With the current state of our economy, a growing number of people have been turning to credit cards to help them get through their financial troubles. While a credit card can certainly be beneficial when caught in a financial pinch, it is important for you to understand the pros and the cons of a particular card before you fill out an application. After all, you want to get a credit card that offers the greatest benefits and will cost you the least amount of money to use. Therefore, it is important for you to better understand some common credit card terms so you can be certain to get the best credit card for your individual needs.

Annual Fees

When sorting through your credit card options, you may find some cards that charge an annual fee. An annual fee is a charge you have to pay every year in order to maintain you credit card membership. Unless you have extremely poor credit and can only qualify for a card that charges an annual fee, you should probably steer clear of this type of credit card. While there are some high-end rewards credit cards that also charge annual fees, this is not the type of credit card that you would use to help you get through rough financial times.

Finance Charges

The finance charges you pay are related to the annual percentage rate, or APR, of the card. The APR may be variable or fixed. With a variable rate, your APR is based on the prime rate and will change as the prime rate changes. A fixed rate APR, on the other hand, will stay the same regardless of changes in the prime rate. Finding a credit card with a low fixed APR is generally the best route to take because you can more effectively budget your payments and calculate the finance charges you will be paying from month to month.

Grace Period

The grace period is an important consideration, as the grace period refers to the number of days you have before you are charged finance charges. Most cards offer a grace period of about 25 days. Be certain to select a card with a grace period rather than one that starts charging as soon as your purchase is made, as this will help reduce the finance charges you have to pay.

Introductory Offers

It is important to note that many credit cards offer introductory rates or other introductory specials. Remember that these rates and specials are only temporary. Therefore, even if a credit card has a great introductory APR, be certain to find out what the APR will become after the introductory period is over. If you know you will be carrying a balance for a period of time, a credit card with a less attractive introductory APR but a better long-term APR may be the better card for you.

About the Author: Shannon Kietzman is a well known author and trusted resource. Shannon regularly writes for . For more info and to order your credit report with FREE credit score please visit

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