Due to the recent changes in laws, credit issuers are now trying to adjust and overcome the best way they know how. For several companies this means imposing more fees and even increasing the consumers’ APR. If your credit card company tries to stick you with extra charges, your first instinct may be to close out your account. This isn’t always the best idea. Continue reading to find out how shutting down your card could end up hurting your FICO score.
Hitting the Required Minimum Purchase Limit
First of all, don’t panic. You’re only one of millions of credit card users facing the decision of paying extra fees or a damaged FICO score. For example, the Citi card company is now imposing a yearly fee on its customers who don’t spend over a set amount per year. If the customer spends more than the company’s desired amount, they will be entitled to the return of their fee amount. Citi’s consumers must use their card more often or for larger purchases, or close their account to avoid a negative impact on their credit score. It doesn’t matter if the consumer voluntarily shuts down their account or if the credit issuer shuts it down, your FICO score is in jeopardy either way. Citi customers that still wish to use their card should continue to make their regular purchases (plus some) to make sure they receive their money back. Failing to hit the required minimum purchase limit will force the consumer to pay the fee yearly until further notice.
Not an Inactivity Fee
The new fee that Citi is imposing is set for customers who are somewhat inactive due to the fact that they haven’t charged their minimum amount. Citi’s representatives, however, claim that this fee isn’t due to inactivity, because those types of rules and limitations are set to be illegal as of fall 2010. This leads one to wonder if Citi’s version of the new charge will eventually be removed also. There is nothing set in stone, as of yet, that pertains to this case directly. These new credit card laws were set in the first few months of 2010 and are still picking up attention from the media. All the finalizations will be made in the months to come.
You Can Shut Down Your Credit Card Any Time
You always have the choice to shut down your credit card. You will also still be able to choose to repay the balance you owe eventually with the charges remaining set at what they are currently. Thanks to the new laws that are in place, consumers can shut down their accounts and disagree with paying the new fees.
Amount of Credit in Use vs. Amount of Credit Offered
Currently, if your card has an outstanding amount due, shutting down your credit line can change your credit score in a negative way. This is due to the part of the credit scoring system that tracks the amount of credit you’re using currently versus the amount of credit that was offered to you. Thirty percent of your credit score is affected by this portion of your credit usage. This is an example of your credit usage affecting your score: Let’s pretend you have a combined total of $3,000 of outstanding balances on four credit cards. The amount of credit offered to you is $14,000. You choose to shut down a Citi account that has no remaining balance, but offers a $7,000 credit limit. You’re now left with one half the credit available to you. Your outstanding balance is now a bigger chunk of the $7,000 available credit that’s left for you. This changes the way the credit scoring system sees you using your credit, and can also alter your FICO score. Falling credit scores make it harder to borrow money. Fortunately, if you have a zero outstanding balance, your credit usage gets bypassed, and this won’t be of concern to you.
Often Review Your FICO Score
Working to improve your FICO score can overcome damage caused in your past. You should review your credit report as often as possible for accounts that are bringing down your score. Make sure that all the charges and late payments are valid claims. If you find a mistake, report it to the bank that made the error, as well as the credit authorities. You must get these errors off your FICO report as soon as you find them to avoid any further complications. If the late payments are correct, use your past errors to work on being better about making payments on time in the future. Good payment records will stay on your FICO report for ten years. Over time, feel free to build your credit by opening new lines as you find the need.