It's no secret that the world of consumer credit has changed dramatically over the past year. Banks have gotten more aggressive during the recession, trying to squeeze consumers for more fees and higher interest or closing down accounts entirely. Help is on the way: President Obama recently signed into law the CARD Act of 2009 to stop unfair practices. But until it goes into effect next February, here's what you need to know to manage your plastic the smart way.
1. Micromanage your accounts
The same banks and card issuers who kept giving you more and more credit only a few years ago are now slashing those limits, raising interest rates mercilessly, and closing active and inactive accounts with abandon. So far, nothing is stopping them. At the moment, they must give you 15 days' (45 days when the new law goes into effect) written notice of changes to the terms and conditions you agreed to—but those notices can go undetected if they're hidden in what looks like junk mail.
Action plan
Register at your card issuer's website so you can check your account online, even if you've been receiving paper statements. Then check the site a few times a week. Did you go paperless? Watch your e-mail closely. If you get one of those dreaded notices or are charged a penalty, make your case with customer service, pointing out your long history with the company and record of on-time payments.
2. Keep your balances low
Back in the day, you could max out your credit cards and cause yourself no harm, provided you didn't go over your limit. Do that now and you'll end up with a low credit score—which means you'll pay higher interest when you refinance your home or take out a car loan, and you'll pay higher insurance premiums, too. To boost your credit score, use no more than 30% of your available credit at any time on individual accounts and collectively, even if you pay your balances in full every month.
Action plan
Compare each card's balance with its credit limit. Stop adding new purchases; at the same time, pay down your high balances to create a big gap between what you owe and the available credit. Shoot for a credit score of 700—the minimum most lenders consider "good." Once you're there, go for 740.
3. Watch when you pay
This is particularly critical if you've switched from paper to paperless billing. Credit card computer systems are set up to look for payments between the statement closing date and the due date; if you use paperless billing, you may not be aware of your due date. If you carry a revolving balance and pay early but no payment is recorded during that little window, you'll be counted as late, and be charged around $39.
Action plan
Card companies can change statement closing and due dates, so verify them each month before you make your payment. (Even if you're getting paper statements, check the dates.) And if you pay by check, always use the preaddressed bar-coded return envelope to ensure that your payment is processed promptly.
4. Think twice before transferring
your balance If you've found a card with a lower interest rate, transferring sounds like a great idea. But first, consider the ratio between the transferred balance and the credit limit on that new card. If you start out using all of your available credit on this new account (and remember, you've just added another line of credit to your collection), your credit score may suffer. And don't forget the 3% to 4% fee charged for transferring.
Is getting a lower interest rate worth taking a hit to your score? I'd say no—unless you have a solid credit score of 700 or higher, you'll use less than half of the credit limit on the new card, and the interest rate after the introductory period is a lot lower than you're paying now.
Action plan
Before you make a move, call your current company and ask them to reduce your rate. Tell them you're considering a balance transfer if they won't cooperate. If you have a good credit score and a history of on-time payments, they should comply; however, you may need to call back several times and speak to a few supervisors. If they still turn you down, research your transfer options at CardTrak.com and IndexCreditCards.com, and make sure you read all the fine print before you commit.
5. Request a limit increase
If the amount of credit you're using is way too close to your current credit limit (either on an individual card or all of your accounts collectively), ask for a higher credit limit. You may be able to increase the gap and improve your score. But be aware that this could also trigger the lender to pull your credit report, resulting in an "inquiry" that could affect your score. And don't even consider a limit increase unless you're very disciplined and you won't see it as an excuse to spend.
Action plan
Call customer service and ask for an increase (have an amount in mind). Defend your request with how long you've been a customer and your payment history.
6. Don't apply for credit you don't need
Although your first few credit card accounts build and improve your credit score, there's a point when acquiring more will reduce your score. Where that point is, no one knows, but generally, two or three cards are all you need.
Action plan
Say "no, thanks" when the cashier offers 10% off your purchase in exchange for filling out the store's credit application. And don't complete an application just to see if you can qualify. In my opinion, store credit cards aren't necessary (and the interest rates are horrendous) unless there's some overriding benefit that will offset the ding in your credit— like getting $500 off a $3,000 refrigerator.
7. Keep accounts open
Closing accounts may seem like the obvious way to fix the problem of too many credit cards. But it's not. Once the accounts are opened, the damage is done. Closing them could actually drag down your score (the loss of available credit narrows the gap between how much you owe and your available credit). If your total amount of credit available declines, as it would when you close accounts, your credit score will go down too.
Action plan
Keep tabs on all of your cards. Know where they are; who, if anyone, is a co-owner or authorized user; how and when the monthly statements arrive; and the specific terms and conditions of each.
8. Keep accounts active
Banks and other credit grantors are on a campaign these days to reduce their exposure to risk by closing inactive credit accounts. No matter who closes the account—you or the credit grantor—it's not a good thing.
Action plan
Until your debt is paid completely (or until you're using very little, say, only 10%), keep all of your accounts active. Not using them gives creditors an invitation to close them. Charge something small each month or so, then pay the balance in full immediately. Consider setting up a small payment (such as a phone bill) charged automatically to a particular account, and have the bill paid automatically.
9. Lower your rate
Before you try to lower your credit card interest rate, know how long you've had the account, and have a general idea of your payment record and credit score.
Action plan
Call customer service and request a rate reduction based on your longevity, payment history and credit score. As we go to press, the average credit card rate in the U.S. is 14.3%. If you're paying more than the average, ask why. Tell them this is unacceptable. If you aren't successful, don't argue; politely end the conversation. Call back in 15 minutes and speak with a different person. Keep trying every day until you receive a reasonable rate.
10. Get the right rewards card
Rewards cards only work if you're not paying any interest on the account. If you usually carry balances, avoid them! Cards that earn miles or offer cash back tend to have higher interest rates (some are close to 20%) than no-fee, nofrills cards.
Action plan
When you're ready for a rewards card, research your options at websites like those already mentioned in item 4, or check out LookupCreditCards.com and CardRatings.com. Match a rewards card with your needs. For example, if you don't travel, go for cash back instead of air miles.
Before you pick up a rewards card, read all of the terms and conditions and understand the limitations. And a word of caution: It's easy to justify needless spending in the name of earning points…but boy, will this come back to bite you when you have to pay the balance in full at the end of the month.
