Are your credit cards WRECKING your credit?

You might think that as long as you pay your credit cards on time you are okay.  In this credit climate that is no longer necessarily true.

One of the biggest factors that goes into your credit score is your credit utilization.  Ideally you want to keep your outstanding balances below 30% of your available credit.  So you're someone who has been careful to keep this ratio down?  Did you know that it could change instantly without you doing anything at all to change it?

Did you know that the credit card industry is actively lowering credit limits regularly now?  I heard a statistic a couple of days ago that demonstrated a substantial decrease in consumer credit lines is underway.  This is happening to those with good credit and bad credit alike.  There are reports of companies chasing down your balance by reducing your limit every time you reduce your balance, keeping you at or near your credit limit.  Some companies, such as American Express, are also cancelling the cards of some who pay them off in full.  In addition, they are reporting it as closed by the credit grantor which is a black mark on your credit report.  This can happen to you even if your payment record is perfect on your credit report.

Ratejacking, the practice of increasing your interest rate on your current balance as well as future purchases, is rampant.  This is happening to those with good credit and bad by previously reputable companies.  Miss a payment with Chase, or pay $1 less than your minimum payment, and expect your interest rate to go to 30%.  What will that do to your finances?

If you have 10,000 in available credit today, and are carrying a 3,000 balance, this is positive for your credit score.  What happens if American Express cuts your 10,000 credit limit to 4,000?  Assuming this is your only revolving credit account...this will be a devastating event.  Your debt ratio has gone from 30% to 75% overnight.  Or what if, even worse, they reduce it down to the 3,000 balance that you are carrying?  Your debt ratio goes to 100%.  That will seriously impair your credit score and have a big impact on you.  This may make it next to impossible to get credit anytime in the near future.  This can make it much harder to buy a home, a car, or other large ticket items.

Be aware of the situation that is unfolding.  If possible, start using cash as much as possible.  Create a household budget and stick to it.  Spend less than you make.  There is no better time to form good habits for the future than in this volatile credit environment.  Do what you can to protect yourself.

Do you have a credit card story?