The Credit Card Accountability Responsibility and Disclosure Act of 2009 goes into effect February 2010, but changes are being made by card companies that might impact you today, even if you have great credit. Here’s what you should do to protect yourself:
1. Keep total charges below 20% of available credit. For example, if you have one card with a $5,000 limit and you charge over $2,500 each month to take advantage of the rewards points, it will negatively impact your credit score, even if you pay your bills in full each month. This factor makes up 30% of your credit or FICO score. To prevent this, consider using more than one card. Lenders are watching this ratio as a risk factor and using it as a reason to lower the total credit line for some cardholders. This creates a vicious cycle because a lower credit line increases your total ratio, which then further lowers your FICO score.
2. Keep your cards from being cancelled. Card companies are closing accounts that are inactive to limit their potential risk and expenses. This hurts you in two ways. If it is a card that you’ve had for many years, closing it will have a negative impact on your credit rating, since 15% of your FICO score is based on your credit history. The longer your history, the better. It will also increase the ratio of how much you owe to your total available credit and make it more difficult to keep below that 20% target. To keep your cards from being cancelled use them at least once every 3 to 6 months. Putting a revolving monthly charge on your lesser used cards is an ideal way of preventing cancellation.
3. Read all those boring mailings you receive from your card companies. In the past they were usually privacy statements or other dry material, but lately they have included notices on rate hikes, additional fees, changes in billing cycles, grace periods and other items that impact you. If you don’t know the billing cycle has changed and it causes you to be late, it will impact your credit score for up to a year. Your payment history is 35% of your score – the biggest factor. If they hike your rate and you have a credit score of 730 or above (the range is 300 to 850) consider looking for a lower rate card on https://www.bankrate.com/ or https://www.cardratings.com/ where there is still plenty of competition for your business.
If you aren’t in the market for new credit, you should still check your credit report for errors or suspicious activity on your accounts. You can do that by going to https://www.annualcreditreport.com/ to obtain a free report. You are entitled to one from each credit bureau every 12 months, and if you find a mistake on your report you can follow the instructions on the credit bureau’s website to get it corrected. Correcting mistakes can make a significant positive impact on your score.
It is crucial in this time of significant change to the financial sector to take an active role in protecting your all important credit score. By taking these simple steps, you will be well on your way.
By Jeannette Jones, CPA, CFP®