For credit cardholders, 2009 was a year like none before, as credit card companies pulled in the reins and consumers were faced with sky-rocketing interest rates, slashed credit limits, and otherwise tightened credit terms.
Alas, the risky lending environment that caused card issuers to tighten the reins in 2009 is likely to continue in 2010. Add to that the new consumer protections that step into effect with the new Credit CARD Act in February of 2010, which make it harder for card issuers to change terms after the fact, and you can rest assured that card issuers will be increasingly careful with whom they issue credit to and, just as importantly, who gets to keep the credit lines they already have.
If 2009 was the year of inflating credit card interest rates, 2010 is likely to become the year of the deflating credit scores. Credit scores have always been important, but with lenders increasingly risk adverse, they will be more important than ever. Credit card companies are facing record defaults, and they will continue to take steps to cut risk and lower credit card write-offs. Expect card issuers to closely monitor credit scores, not just to gauge the credit risk of new credit card applicants, but for existing cardholders as well. In addition, expect the credit scores required to get the best terms to be inching upwards.
To navigate the changing credit environment, here are three tips to protect yourself and your finances in 2010.
1. Know Your Credit Score
As lenders shore up credit risk, the criteria for what is considered an excellent credit score are changing. In the past, a credit score above 720 was considered a good credit score, and would be sufficient to get you approved for credit cards or loans with the best terms. In today’s lending environment, aim for a credit score of 750-760, if you are planning to apply for a new loan or a credit card with good rewards and rates in 2010.
To find out where you stand at the start out the New Year, pull a free copy of your credit report from AnnualCreditReport.com if you have not done so recently. You are entitled to a free copy once a year. To find out what your credit score is, pay the $8-12 additional charge required, or alternatively, use this handy FICO Score Estimator from Bankrate.com.
2. Bolster Your Credit Limits
In 2010, credit card companies will continue to drop cardholders that don’t contribute to their bottom line. That includes both cardholders that are considered risky, because of their credit score or borrowing profile, as well unprofitable cardholders, i.e. those who never use their credit cards.
To avoid being singled out for account closure or a credit line decrease, use all of your credit cards regularly, e.g. by cycling through them every two or three months. Avoid using all your cards in any given month; this makes payments tricky to manage and increases your risk of late payments and penalty fees. Instead, pick one or two cards to use for one month, then move on to another one to two cards, and so on. Synchronize the due date for all your credit cards, so you don’t have to constantly keep track of when different cards are coming due.
3. Watch Your Credit Utilization Ratio
While most people know that they need to pay their bills on time to keep their credit score high, most are not familiar with how to optimize the credit utilization component of the credit score. Yet, this important ratio makes up a full 30 percent of FICO scores.
The credit utilization ratio is the ratio between the total credit limit available on all your credit cards and the total amount of outstanding balances. If you use up a large portion of your available credit, lenders view it as an indication of financial distress, and this dings your credit score. In short, the more credit card debt you have relative to your total credit available, the higher your credit utilization ratio, and the lower your credit score.
Your credit utilization ratio will not just affect your credit score, it will also put you at higher risk for credit limit cuts. If credit card companies see that you’re using up much of your available credit, they will consider you a high-risk cardholder and will be more likely to single you out for a credit limit decrease.
To determine your credit utilization ratio, read through your credit report and total the amount of credit you have available (if the information listed in the credit report is not correct, be sure to correct it (see below)). Then total the revolving balances on your credit cards. Divide the total debt outstanding by the total credit limit to arrive at your credit utilization ratio. To have the best effect on your credit score, the ratio should be below 30 percent, and preferably at 10 to 20 percent.
4. Monitor Your Credit Report
Regularly look through your credit report to make sure all your credit cards all still open. Card issuers have been closing accounts left and right, and they don’t have to give cardholders notice of the cancellation. If a credit card with a high limit has been cancelled, call the card issuer and ask to get it reinstated. Many will oblige you if you have been a good customer in the past. Be sure to explain that you plan to use the card more actively in the future. Similarly if a credit limit has been cut, call the credit card company to inquire why, and ask what you can to get the credit limit back or at least increased.
In addition, for best results, follow these other basic practices for increasing your credit score.
