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Better keep eye on your credit

By Kevin DeMarrais, Source: MCT News Service

HACKENSACK, N.J. _ An old joke used to be that in tough times, banks lend money only to people who don't need it.

But it's not a joke.

The credit crunch is starting to affect consumers directly, as banks upgrade their standards for credit cards and loans. So even if overall interest rates hold steady _ and for the most part, that seems to be the case _ the financial meltdown on Wall Street is making it increasingly difficult for the average consumer to get the best rates on credit cards and bank loans.

It's not a problem if you earn lots of money and have a high credit score _ in short, if you don't really need credit.

But it's getting more costly for the rest of us, and that could be a problem as the holiday shopping season approaches _ especially after Congress failed to vote on badly needed consumer protections.

At first glance, the financial crisis doesn't seem to have had much effect on credit cards.

New card offers still show up in the mail, and the weekly tracking index compiled by LowCards.com showed that interest rates moved slightly lower this past week _ right at the height of congressional debate on the bailout.

Interest on the average credit card rate was 12.13 percent for the 1,260 credit cards that LowCards tracked on a recent week. But that can be misleading, said Ben Woolsey, director of marketing and consumer research at CreditCards.com, a Texas-based credit card marketer.

"I think banks have raised the bar on what they consider excellent credit," Woolsey said. "They're always going to advertise the best rate for the best customer, but what you get could be different. They have lots of different rates based on credit scores."

Rates that issuers promote are still about the same, said Bill Hardekopf, CEO of LowCards.com.

"But if you and I both apply for a card, you could have excellent credit and get 7.99 percent, I could have good credit and get 9.99 percent and someone else might get approved at 11.99 percent," he said. "It will depend on your credit score."

The FICO number _ for Fair Isaac Corp., the company that developed the rating system _ that determines whether you qualify for credit, as well as the interest rate and other terms.

"FICO scores help lenders make accurate, reliable and fast credit risk decisions across the customer life cycle," Fair Isaac says on its Web site. "The scores rank-order consumers by how likely they are to pay their credit obligations as agreed."

The logic behind FICO scores generally makes sense, but anytime you replace human logic with unfiltered numbers you can get illogical results.

That's what's happening now.

In an attempt to reduce their exposure, card issuers are cutting credit lines, and not always due to overt actions by the consumer.

"They seem to be tightening how they classify people," Hardekopf said.

Fewer are classified as excellent, which means more are put in fair or poor categories "and their rates are going up."

The implications can be significant, Woolsey said.

Credit-card issuers are free to change your credit limit or other terms any time they want, "so you may not be aware that the rug has been pulled back a little," he said.

A notice can be included in your monthly statement "or it could come in an unmarked, white envelope that makes it easy to miss and toss out as junk mail."

That means you could go over your limit and may not learn what happened until you get to the checkout and the card is rejected.

Or you could end up being hit with hefty over-the-limit fees and having your interest rate increased, Woolsey said.

That's not all. If your credit limit gets cut, the ratio of credit-card utilization could become higher, and that can make life even more difficult, he warned.

For example, if you have a credit limit of $5,000 and charged $2,500, you would be using 50 percent of your available credit. But if your max is cut to $3,000, that same outstanding balance would amount to 83 percent of your credit limit.

"That makes you look riskier, and your credit scores could go down, even if you haven't changed your habits," he said. "It's not a good outcome for consumers."

(EDITORS: STORY CAN END HERE)

The impact would not have been as great had the U.S. Senate approved the Credit Cardholders Bill of Rights Act last month. The bill, which breezed through the House, would ban abusive practices, including a ban on arbitrary changes in terms.

But the bill never came to a vote, despite extensive efforts from consumer groups.

"We tried, we earnestly tried to get some Senate action," said Pam Banks, policy counsel at Consumers Union.

"It was a disappointment, but it has not dampened our resolve to get this done," she told me.

All this means consumers need to pay even closer attention to the card accounts than usual, Hardekopf said. "It's up to you as a consumer to be aware of the changes that go on with your credit card."

Check the "terms and conditions" closely three to four times a year, to see exactly what your APR (annual percentage rate) is, what changes have been made, what the fees are and what your limit is, he said.

The credit-card industry has changed significantly in recent months, and this is having a far-reaching effect, he said.

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(c) 2008, North Jersey Media Group Inc.

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