Another article on credit card changes

Yesterday, the Star reprinted (in part) an article from the Washington Post detailing some of the consequences of the credit crunch on credit card users in the U.S. While some of the details are probably U.S.-specific (at least at this point), there are consequences that many people overlook.

Before I get to those consequences, among the steps the article set out as being followed by U.S. credit card issuers:

$ - credit limits being cut (in one case with the explanation, "your total debt is too high relative to your payment history with us and other creditors.")

$ - rates and fees being raised. (One example given: average late fees on all cards have gone up by about 10% in the last year. Elsewhere, I have seen mention that being late twice will see your fate go up to 24.9% from 18.9%. While this looks like a 6 % increase, it is actually an increase of 6 percentage points. If you do the math, you will see that 24.9 is 131.8 % of 18.9. And don't forget, you are paying your credit card with after-tax dollars, so you've had to earn $1.40 or so to have the $1 to pay to the credit card company.)

$ - suspending zero-per-cent balance transfer offers

$ - shutting down inactive accounts.

Sadly, one of the people who had seen her credit limit lowered and rates raised had been in good standing until she withheld payment due to a dispute with a merchant. (Of course, the article only gave her side of the situation, but I have spoken to consumers here who have similar tales of woe.)

Now, I mentioned consequences earlier. To quote from the article (in the Post): "Reducing credit lines, in particular, has wreaked havoc on many consumers by affecting their debt utilization ratio, which is the percentage of available credit they are using. A high debt utilization can lower a credit score, which then makes it tougher to get credit or at least get credit under favorable terms." If you owe $2000 on a $5000 credit card, you are utilizing 40% of that card's available credit. If for whatever reason that credit limit were reduced to $2500, the utilization is now 80%, and you will see your credit score suffer. (Actually, in the U.S., there is now a credit-score-hit at 20% utilization. See earlier posting.)

The bottom line: it's now more important than ever to handle your credit responsibly.

(For those who wish to read the article, it's available at the Star website: http://www.thestar.com/article/538612. The original article is available at the Washington Post, which requires free registration: http://www.washingtonpost.com/wp-dyn/content/article/2008/11/15/AR2008111500216.html. If you have time, read the original version -- some of what the Star cut is quite interesting.)