Credit Card Debt Management

If your credit card accounts are among those being affected by credit limit cutbacks, it may be affecting your FICO score by narrowing your debt-to-credit limit ratio. Creditors typically like to see this ratio at 30% or less, but if your $20,000 credit limit just got halved on a card with a $5,000 balance, your ratio just went from 25% to 50%. It can pose a problem, depending on how high your credit card balance is, but there are some steps you can take that may rectify the issue.

Call and ask. Your credit card issuer may be willing to reinstate your previous credit limit. Chances are good your credit limit reduction was the result of some arbitrary computerized decision, and a real human being may be more sympathetic if you explain your situation. If necessary, ask to speak to a supervisor who may have more bargaining power. The biggest mistake you can make is to simply take your lumps and never ask for mercy, if you really need it.

Transfer your balance. You can open a new credit card, although this will not necessarily be the best thing for your FICO score, which takes into consideration the age of all your credit accounts. You might also shift the balance from one of your existing credit card accounts onto another of your existing credit card accounts where the credit limit is higher. For instance, your card had a $4,000 limit that got sliced to only $2,000. As a result, your $1,000 balance suddenly looks much higher in relation to the limit. If you had another credit card with, say, a $5,000 limit and zero balance, the $1,000 balance would fit much better there. It will probably result in a balance transfer fee and the interest might be higher on the second card, although you might be able to call the $5,000-limit card issuer and negotiate that interest rate. Just tell them you’re considering closing the account, but the interest rate is awfully high for your liking. You may be surprised what could result. Keep in mind that negative consequences are possible from too much balance shifting. You could see an interest rate hike or even a credit limit reduction on your other credit cards.

Your credit score is immensely important, not only in your finances, but in life. Insurance costs, job prospects, and homeownership are all affected by this three-digit number. Determined by the Fair Isaac Corporation, thus the name FICO, your credit score has tremendous power over your life.

This is why it’s quite important to understand what makes up your credit score and how you can control it. As the pie chart shows, your credit score is roughly 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% types of credit.

1. Payment History

This is fairly self-explanatory — pay your bills on time, every time. Why? Delinquent payments can stay on your credit report up to seven years. If you have problem paying a bill, talk to the lender and update them on how much you can pay and when it will be available. One important note here is that, while everyday bills like utilities won’t go on your credit report, a late payment on one of these can increase your credit card interest rate (i.e., the monthly amount you must pay). Then, you risk falling behind on the credit card payments and your credit report can become marred.

2. Amounts Owed

This category takes into account not only what you owe currently, but what you could possibly owe in the future if you were to max out all your available lines of credit. Essentially, lenders want to know how much you could borrow from all lenders combined, and whether you would be financially able to pay it all back. This speaks directly to your level of risk as a borrower. One solution is to close lines of credit that are paid off and sitting unused, but only if they are newer accounts from within the last three years or so.

3. Length of Credit History

Lenders like to see an established history of not just having credit cards or loans, but having the same accounts with the same lenders over several years. This is why, if you have lines of credit that are paid off and sitting unused, but have been with you quite a while, you should consider keeping them open. Instead of closing it, ask the lender to reduce the available balance to the minimum, then cut up the card and stop using it.

4. New Credit

Try to limit the amount of new credit accounts you open within a short period of time. Also, try to contain credit inquiries (i.e., credit checks run on you for the purpose of obtaining a loan) within a short time period. If you’re shopping for a car or home loan, lenders are going to be checking your credit report a lot. It is gentler on your credit report to get this all out of the way within a couple weeks, as opposed to a couple months.

5. Types of Credit

Revolving credit, like credit cards, should ideally appear on your credit report alongside installment loans, as in a mortgage or car loan. This shows lenders your level of responsibility in handling a variety of debt.

Also, don’t forget to check your credit report often. The best way to get started is to visit AnnualCreditReport.com. A credit check can help correct any reporting errors, as well as identify weak spots in your report and how they might be strengthened.

It’s a known fact that expense accounts can spiral out of control. This is as much true for government employees as for corporate employees, judging by recent news that federal workers were caught charging lingerie, online dating services, iPods and other superfluous items to government credit cards. In the current economy, few organizations can really afford extravagant spending in the name of client relations, let alone any stray personal items that may fall outside the bounds of company-approved purchases.

MasterCard has an answer. The inControl credit card will enable supervisors to set a spending limit and the time parameters within which spending can occur, list which hotels and restaurants fall under the umbrella of acceptable spending, and even receive real-time updates by e-mail or text message regarding what purchases are made with a particular card. It really is a remarkable service.

“It will help reduce maverick spending, improve compliance with corporate policies, and simplify accounting,” Steve Abrams, MasterCard’s global head of commercial payments, told BusinessWeek earlier this month.

Undoubtedly, the launch of this new product — offered in conjunction with Orbiscom technology and the Royal Bank of Scotland — will forever change the way business is done. Maybe Uncle Sam should sit up and take notice.