April 25, 2009

Paying More for Credit

In case you have not heard, financial institutions are looking to charge you more for you to have the ability to use credit. In the past this has basically been based on your own credit worthiness and score, but now, it is being done across the board.

For example, I received a letter from my credit card company last week letting me know that my prime plus 1% card was going to change to prime plus 3%. Well, I was not happy about it but fine. I don't carry a balance really anyway. Then in the fine print it said the minimum interest rate would now be 11%. For those that don't know, prime is currently at 4.25%. My rate was jumping from 5.25% to 11%!

When I called the bank to ask about it, I was told that "the bank" was doing it to "all cardholders." Even though I have excellent credit and have never missed a payment, "the bank is readjusting their cost structure" due to the "economic environment." I could either keep my card and accept the change, or I could terminate the card, keep my rate, and continue to make monthly payments.

Now I completely understand that those that are a higher risk should indeed have higher interest rates because of the risk in not paying back the funds, but an across the board raise of rates is pretty bad to say the least. It is not only those that have credit issues, but the ones that have good credit are now forced to help "the bank" due to the actions of others.

Financial institutions have also started to lower credit limits. I may have not said before, but in December I received a letter from a home improvement store that I have used over the past few years to do some little remodeling projects here and there. The letter said that they were lowering my credit limit by about 15% or so because of the current economic environment. Additionally, this was a credit card wide change. The funny thing is the only thing I have ever charged on the card has been at zero percent interest (not even near the limit they gave me), and it is always paid back before the promotion expires (thus no financing charges).

I don't think I am the exception, and I believe that some of these practices are just plain ridiculous. By charging higher rates, the firms are actually limiting what most "good" people will spend because somewhere in the back of their mind they are worried about the interest rate. If you couple that with lower credit limits to begin with, you are looking at some consumers that will continue to slow down spending because of the credit costs.

The best thing to do is have a plan on big purchases to pay off the balances and keep your interest rates as low as possible (even when being raised, call the company to question it). Remember that credit card interest is not deductible, so paying that interest is quite literally like throwing money away. Sometimes it is necessary, but definitely look to limit it when and where possible.

Good luck, and I hope the financial institutions skip over your accounts when making changes.

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