The New Credit Landscape: Reassess Your Accounts
With new credit laws in place, now is the perfect time to re-evaluate and strengthen your credit portfolio.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 went into effect on Feb. 22 in order to protect consumers. According to the White House, Americans pay nearly $15 billion in penalty fees, and 44% of families carry a balance on their credit cards. These new requirements stipulate that credit card companies must display plainer language on statements and ban unfair rate increases and fee traps. The Act has “re-set” the way companies handle giving out credit, says Rick Stoetzer, Senior Vice President, EFD and Card Services Manager with First Midwest Bank.
“It’s a much better framework and disclosure for clients,” he says. “The Credit CARD Act establishes rules that make it easier for people to understand credit information no matter who they’re dealing with.”
Stoetzer says the Act is beneficial for consumers, but he also notes that getting credit, especially unsecured credit, is going to become more of a privilege. Liz Weston, author of “Your Credit Score, Your Money & What’s at Stake” and personal finance columnist who produces the blog AskLizWeston.com, agrees and says that unless you have a credit score over 700, you might have some trouble getting credit. A score above 750 is often considered the gold standard, but it’s not easy for most people to reach. The national average is around 680, and according to the Fair Isaac Corporation, or FICO, only 40% of the nation has FICO scores above 750. This challenge makes it an opportune time to reassess your credit portfolio and figure out the necessary steps to improve it.
A Diverse Portfolio
“You need to diversify your credit,” Weston says. “You can’t be at the whims of just one company. If they do something you don’t like, you can take your business elsewhere.”
Weston says it’s a widespread misconception that if you have too much available credit, it looks bad; she says that’s not even a factor in FICO scoring. By diversifying your credit, you can take a credit card from one bank, which might not offer the best interest rate, for example, to another institution, Weston explains.
“Diversifying credit is more for self-protection than anything else,” she says. “If you want to get credit elsewhere, you can find a company that works for you. All issuers have different business plans and policies and treat customers differently.”
Weston says the FICO credit scoring formula values different types of credit. Also, it’s important to keep your balance relatively low because the formula also responds positively to the size of the gap between the credit you’re using and what’s available.
Taking on the Responsibility
If you’re afraid of having too many credit lines open because the temptation to spend will be stronger, Weston advises you to trust your instincts and consider your history of handling finances. Unless you have a past of racking up balances, you should open yourself up to the possibilities.
“If you handled responsibility well in the past, you’ll probably do so in the future,” she says.
So long as you don’t max out your cards and you pay on time, having numerous lines of credit open really helps your FICO credit score, which is the formula most lenders use, Weston says.
Although it’s important to expand credit with more than one institution, Stoetzer says it’s also important to deepen the credit relationships you have. “Broaden relationships with people that you trust and who know you,” he says.
Institutions you build a relationship with are the ones that will give you an answer in a timely manner and will be willing to go beyond a credit score alone when making decisions, such as whether or not to grant you a loan, Stoetzer says. He recommends turning to your financial advisor for major borrowing activity.
Have a Good Balance
If you’re unsure of how much credit to have, Stoetzer recommends really taking the time to determine your needs. It’s great to have a credit card with a low interest rate for any unexpected situations, such as travel for a family emergency or an unplanned medical expense, he says. Stoetzer also recommends staying close to home and forming a relationship with your local bank. Community banks, like First Midwest Bank, usually offer cards with perks, such as rewards programs or low interest rates.
“Don’t just go for the sale of the day,” he says. “Your community bank is in it for the long haul. Anyone can offer you a deal in the short term, but is that really what you’re looking for in a relationship?”
A Healthy Portfolio is a Reviewed Portfolio
Regardless of the type of credit you get, the Act provides a good reason to review your portfolio and figure out which credit best meets your needs. Stoetzer says you’re entitled to a free credit bureau report every year, so he suggests making sure it’s a part of your annual check-up. This will make your portfolio as transparent as possible so you are well informed.
“You want to make sure there’s no inaccuracy out there,” he says. “It’s now become a part of your responsibility more so than in the past.”
Historically, interest rates were not risk-based on your credit score as much as they are today, and occasionally, lines of credit are now reduced or even closed based on updated credit bureau information, Stoetzer says.
“These are newly developed lender practices that make a review of your credit bureau reports on an annual basis an important part of maintaining your fiscal fitness,” he says.
Types of Credit to Have1
ONE MAJOR CREDIT CARD: Weston says a major card such as Visa® or Mastercard® will reflect well on your credit score. Stoetzer adds that it’s the fastest way to solve an emergency situation. A major credit card can help with short-term needs, such as traveling out of the country, but it can also help with long-term needs, such as providing peace of mind during emergencies thanks to additional funding, Stoetzer says.
INSTALLMENT LOANS: Showing that you can make timely, fixed payments over a specific period of time is good for your credit score, Weston says. Plus an installment loan (e.g., mortgage, auto, student) shows that you’ve already passed one screening that established you as a responsible individual. If you need a certain amount of money, Stoetzer recommends getting a loan instead of a credit card because loans usually have a lower interest rate.
STORE CARD: Stoetzer says a store card is a great way to show loyalty, and you often can get great deals or coupons. But he cautions against having too many. Though they offer great perks, Weston says they also usually have the highest interest rates, so if you sign up, make sure you can pay off the balance in full each month.
The Act Simplified
Here are some of the major changes that were implemented in February:
DISCONTINUATION OF OVERLIMIT FEES: Institutions must obtain a consumer’s permission to process transactions that would cause the account’s credit limit to be exceeded.
NEW MINIMUM PAYMENT WARNINGS ON STATEMENTS: Issuers must display on statements how long it would take to pay off the existing balance plus the total interest cost if the consumer only paid the minimum amount each month.
LIMITED INTEREST RATE INCREASES: The Act bans rate increases on existing balances due to “any time, any reason” or “universal default,” and it restricts retroactive rate increases due to late payment. These Act changes only apply to future transactions.
RECURRING DUE DATES: To end late fee traps such as weekend deadlines, the Act mandates that due dates are now on the same day each month.
PLAIN SIGHT/PLAIN LANGUAGE DISCLOSURES ON STATEMENTS: Before an account is opened, creditors must give consumers disclosures of account terms, such as fees consumers may be charged. Then, they must display on periodic statements how much in fees consumers have paid in the current month, as well as the reasons for those fees.
Ever wondered if you should pay off credit debt first, or invest in savings? Learn which strategy is best for you with our budgeting and credit calculators, available at firstmidwest.com, and learn about First Midwest Bank’s credit card solutions at firstmidwest.com/creditcards.