New bank credit card policies could send your credit rating spiraling down

Fearing that the Credit Cardholder's Bill of Rights could pass Congress this year, credit card companies are jacking up rates and lowering credit limits even on their low-risk customers with credit scores above 700. People with top credit scores are seeing those scores drop 100 points or more, especially if their credit limits have been cut on several cards.

I had a call Saturday from a friend with a credit score of 760 wondering why her Chase card got jacked up to a 19% interest rate. She didn't know what she had done to deserve this. I could only assure her it had nothing to do with her actions. She pays everything on time and paid off this particular card in full each month, so she won't have to worry about paying that outrageous rate as long as she continues to pay in full each month. The only choice given her by Chase was to cancel the account before the rate went up.

I've heard from many readers with similar stories about Chase, which right now seems to be the most aggressive about jacking up rates on people with good credit histories. I checked my Chase card and it happened to me too, but I don't even remember getting a notice. I've never paid late in my life and don't pay credit card interest, so I'm not worried. While I haven't heard other credit card companies being as aggressive as Chase in jacking up rates, I have heard many sadder tales of people seeing their credit card limit cut by 50% or more.Just last week a small business owner told me his American Express business card limit was cut in half. A card he depends on to cover short-term cash flow needs. When he called to find out why, he was told his limit was cut because he shopped in places where people who tend to have credit problems shopped. I had a hard time believing that answer until I saw Saturday's New York Times, which had story about American Express's usage of consumer data points.

The Times reported that, "The company has been looking at home prices in your area, the type of mortgage lender you're using and whether small-business card customers work in an industry under siege. It has also been looking at how you spend your money, searching for patterns or similarities to other customers who have trouble paying their bills." I'm sure that American Express is not the only one doing this, but it is the only credit card company that told its customers about it. American Express told the Times they're not doing this anymore, but my best guess is that they'll continue do it but won't talk about it.

Why can a reduction in credit limit be even more harmful for a customer? When your credit limit is cut you have less total available credit. If several cards do this, it can result in a huge hit of 100 points or more to your credit score. That's because FICO uses a debt utilization ratio to calculate your score. If your score goes down dramatically then other cards will jack up interest rates or cut your credit limit, which can create a downward spiral for your credit status.

Suppose you had $40,000 worth of total credit before the cuts with $10,000 in credit card charges. That would be a debt utilization ratio of 25%. As long as you keep it below 30% you can usually get a score above 700 if you have no late payments or other derogatory reports on your credit history. But suppose several credit card companies cut your credit limits and you now have only $20,000 of available credit. That would make your debt utilization ratio jump to 50% and your credit score would drop. That's exactly what's happening to a lot of people with otherwise good credit histories.

What can you do to try to stop this carnage? Write to your Congressman, tell him your credit card story and ask him to make sure the Credit Cardholder's Bill of Rights passes as soon as possible. Unfortunately for many it may already be too late.

Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score" and "Surviving a Layoff: A Week by Week Guide to Getting Your Life Back Together."
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