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Lenders / Banks & Consumer Profiling
The U.S economy is struggling. Americans are walking away from mortgage and credit card payments for a variety of reasons. Banks are struggling to stay afloat. The demise of Washington Mutual was the biggest US bank failure in history. Due to many factors, lenders are looking for more ways to make money. In this newsletter we will cover the latest updates from credit card companies, including the new tactic creditors are using called consumer profiling.
Consumer profiling is the newest way that credit card companies are using to raise your interest rates and increase penalties. I will touch on all the information that has been released to keep you informed. I urge all of you to check the financial news often regarding consumer profiling. Somehow it does not make breaking news so be sure to do your homework. A little research could save you hundreds of dollars.
Credit card companies have been in financial strain longer than most of us are aware of. The reality is if banks and lenders are financially squeezed; borrowers are going to be penalized for it. In April of 2008 Washington Mutual announced that some customers would receive a significant rate increase on credit cards. In the same month, Discover announced that effective May 1, 2008 the new penalty rate would be 31%. More recently Bank of America has been under pressure with many customers for raising interest rates to 28% with no justification in doing so. In addition to this they are also raising minimum payments but have not specified by how much.
It does not stop with those banks. Chase followed suit and released notification that minimum payments would increase by 3%. Currently customers must pay 2% of balance, by increasing it to 5% it will more than double what is required. There are many customers who have a hard time meeting the required payments as it stands now. The increase in minimum payments is going to have a trickle affect in default rates and reduced credit scores in the future. In addition to increasing minimum payments there would be a $10 monthly "management" fee for customers who carry a large balance longer than 2 years.
Where do you shop? Where do you live? This may actually affect your terms on your credit card. American Express is now analyzing where you live and shop to determine your credit standings. They have been slashing credit limits and increasing fees and interest rates depending on where you spend money and live. People who reside in a zip code where the foreclosure rate is high may notice that their credit limit has been decreased. If other cardholders have used American Express at places where you shop and have a poor payment history then you may be hit with higher interest or a reduced credit line.
Lenders across the board are lowering credit lines on credit cards and home equity loans, even for people with good credit history. This can be detrimental for certain borrowers. Considering the soaring unemployment rate, along with the economy many people depend on credit cards for everyday basics. Many people are actually taking money out of home equity lines and credit cards and putting it in the bank just in case they should need it. By liquidating the money from these accounts you eliminate the risk that the lender will decrease or eliminate you credit line.
A huge disadvantage to lowering credit lines is the poor effect it has on someone's credit score. About 30% of a credit score is based on how much someone owes. For example, a person who has a $2,000 balance on a $10,000 card is only utilizing 20% of their credit. Now if that same person's limit gets reduced to $4,000 the cardholder is 50% maxed out which reflects poorly toward credit.
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