Minimum payments on credit cards are rising

This is an article from bankrate.com showing that the average consumer is now making the minimum payments on their credit cards.

I will be adding a post after this one discussing the impact of making the minimum payments.

This might be worth taking a look:

http://www.bankrate.com/brm/news/debt/20050503a1.asp

FrontLine's "The Secret History of The Credit Card"

I found this news story put together by FrontLine and The New York Times.

It talks about some of the hostory of credit cards, but also many of the dirty little secrets of the credit industry.  If you are looking for some background, this is a good place to start.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/

Why Did My Credit Card Company Reduce My Credit Limit?

Becky has a JC Penney card, issued by GE Money Bank. She has never been late (she showed me her payment history online), and is well below her credit limit of $400.00. A few days ago, right after she made a large payment and paid the card off, she got a letter telling her that her credit limit would be reduced to $100.00 or her current credit limit, whichever was greater.

Now, fortunately for Becky, she had just paid off the card. Or maybe that was unfortunate. She now has a $100.00 limit on her JCP card. From the standpoint of her ability to spend, she doesn’t really care. She has worked hard to be able to live on a cash basis. However, from a total credit line standpoint, this really hurt her.

Part of your credit score is determined by your total credit used divided by your total limit. If your limit is decreased, your scores might fall, as your percentages rise. Since Becky is working on rebuilding credit, having this kind of a change might adversely impact her scores.

So why did JCP do this? Well, there is an easy answer. They are trying to weather the financial storm. They are taking clients who might be a risk and reducing their credit limits. How do they determine risk? Well, as is normal with their practice, they look at credit history, ability to pay, and how much credit a person has. If they find a situation that might cause a potential problem, they are within their rights to reduce the rate.

In Becky’s case, she had recently applied for, and been approved for, a new credit card with a $1500.00 limit. This was because she had taken care of her credit, and never missed a payment. However, that new card ended up being a big red flag for JCP. At some point, a creditor will look at your available limits, calculate the max payment you might have to make if you maxed out all of your cards, and then decide if they think you will be able to pay things back. If your creditors think you can’t pay back what you use on your cards, they may reduce your limits!

How can you combat this? Well, Becky called in and talked to a JCP credit service person. They told her that ALL accounts had their credit limits reduced! I can’t verify this, but in talking to 4 other people that have JCP cards, they all got similar letters. Of course, the people I spend time with talking about credit have all had some credit problems in the past, so they might not be indicative of the normal treatment of a customer by JCP. Becky was told she couldn’t get her limit raised.

What are your options? Well, you really have two. You can either live with the decision, or you can pay your account off and cancel it. Personally, I think canceling your card is a bad idea. First, it hurts your credit aging, and second, it reduces your total available credit by the credit limit on your card.

When you have a limit lowered, immediately start paying the balance down to improve your debt ratios. When you get it paid down, just stuff it in your sock drawer and leave it there for emergencies.

Your creditors can do damage to your scores, but you can recover quickly from a credit limit being lowered by a creditor. Make sure, if your limit is lowered, that you contact the creditor to find out why, and see if they will reconsider. But, unless you have a really good reason to do so, don’t close those cards as that can hurt your scores more than the reduced credit limit.