Strategies For Responding To The New Credit Card Accountability Disclosure Act

Recent enactment of the Credit Card Accountability Responsibility and Disclosure (CARD) Act has had a significant impact on both credit card companies and consumers. One of the byproducts of the new act is that the methodologies for calculating credit scores are different, and, in some cases, counterintuitive. This requires consumers to carefully assess their actions and decisions when it comes to managing their card accounts. Here are some important considerations:

Paying off a card completely could be a bad idea.

With the new CARD Act, credit card companies may only apply rate increases to balances going forward. This is a switch from previous rules which allowed lenders to apply interest rate increases to both existing balances and future purchases. But here’s the catch: When FICO does ―utilization‖ calculations, they include credit limits of closed accounts IF there’s a balance on the account. So a small remaining balance on a large credit limit is an enormous help. If you close an account due to an undesirable rate hike, your credit score could actually take a hit if you pay the balance off completely. Better bet—leave a small balance there.

You may want to max out certain card limits.

Some charge cards such as American Express and certain high-end cards with no pre-set spending limit (e.g. Master Card World or Visa Signature) don’t report their credit limits to the bureaus. So the FICO may bypass those accounts or use the credit limit in lieu of the high balance figure for the account.

More might be better when it comes to cards

When credit score companies do their evaluations, a huge portion (up to 30%) of your score can come from something called ―utilization‖. This is the portion of your available credit that you are utilizing. So, one way to improve this is to have a reasonable number of cards. One or two may not be enough. It may be beneficial to have 4-6 cards, even if they have low credit limits and you’re not using them much. Granted, length of credit is an important credit scoring item, but it’s even less critical than utilization. It’s important that you don’t attempt to add new cards all at once. It’s a better approach to add them gradually over a period of years.

Asking for a lower APR may not be a good idea any more

Conventional wisdom used to be that you should continually call your credit card company to ask for a lower rate and they would frequently grant it. Those sentiments are changing, though, because a rate reduction request could actually prompt the issuer to do a review of your account. If they see something that concerns them they could actually raise your rates or reduce your credit limit. The only situation where you should consider doing that is if you have other card limits available with sufficient history so you could transfer a balance if such a review occurs. This is another reason to have several cards in your ―portfoilio‖.

The lines between personal and business are blurring.

Another new development is that some card issuers are reporting business card account information to consumer credit bureaus. That means if you’re running a high balance on your business account, even if you pay it off each month, you may be adversely affecting your personal credit rating.

As always, it’s important to monitor your credit rating and to continually stay abreast of the methods used by credit scoring bureaus and the policies employed by the card issuers themselves.

By Dan Schleck and Mike Sheridan – Minneapolis Bankruptcy Lawyer, Minneapolis, Minnesota

This content is not meant to constitute advice of any kind, including without limitation, legal advice of any kind. If you require advice in relation to any legal matter you should consult an appropriately qualified lawyer.

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