RebelCapitalist: Financial Information for the Rest of Us | Beware: Read Credit Card Statements Carefully

Beware: Read Credit Card Statements Carefully

Apr 02, 2009 | By: Mr_Blue | Tags: credit cards, debt management

Credit card companies are cutting credit lines and jacking up interest rate/finance charges. I have heard instances where people only found out about the changes from reading their credit card statements. In a crazy perverse way cutting credit lines may actually hurt your credit score despite paying your bills on time. Higher interest rates increase our monthly bills which obviously is not good right now.

It is becoming absolutely important, a matter of financial survival, to manage our credit/debt very carefully. Our credit scores depend on a factor known as debt as a percentage of available credit. This means that when a credit card company cuts your credit line, particularly for no reason, this lowers your amount of available credit and assuming that your debt owed has not changed means that this factor of debt as a percentage of available credit will increase - which has a negative effect on your credit score. For example:

You have 5 credit cards with $2,000 limits = $10,000 available credit

You have $4,000 outstanding balance on all credit cards. Debt as a percentage of available credit = 40%

Credit card company cuts credit lines on unused cards so that you now have $6,000 in available credit but you still have $4,000 outstanding balance

Debt as a percentage of available credit = 67%

If your debt as a percentage of available credit is 75% or more you may find it difficult to find new loans despite having a good payment history.

The other thing to watch out for is higher interest rate/finance charges. Jacking up the interest rate is causing real problems for people because it is obviously increasing the minimum monthly payment. We know that paying the minimum monthly payment is not going to get us out of the debt whole and increasing the interest rate makes climbing out much more difficult. This move by the credit card companies may be causing some real pain for people struggling to pay all their monthly bills.

Answer: Stop using them and get aggressive with paying them off. Sounds easier said then done but it is possible and short of filing bankruptcy and destroying your credit it may be the only option. Unless of course you win the lottery or land a much better paying job.

The other thing to be aware of is that by law we are allowed to access to our credit file once every 12 months. Definitely take advantage of this. You can obtain a free report from the official website: AnnualCreditReport.com. Don’t be fooled by imitations.

Good luck.