Credit Rate Alert

I had a coworker complain recently that his credit card issuer had jacked up his rate from a nice 7 1/2% to a whopping 24.99%, he mentioned he had never been late on a payment with the credit card company or other creditors as well. It seems that with the current state of the economy this is not uncommon with a reported 37% of card issuers following this lousy practice! This is insane as we are seeing unemployment rates elevate to even higher levels week after week!

My coworker's options were few as he mentioned he could choose to shut down the card and maintain the current rate which would affect his FICO score or he could pay the new rate which is like stabbing yourself in the eye with a pencil. The two options are tough to swallow: closing the card down would lower your credit score yes, but there are things to consider such as how long have you had the card, what is your credit limit, and is there an annual fee. If the limit is below $5,000 and it's a newer account (less than two years old), my advice is to close it down like a high school prom after midnight. If you know your credit score and it's 700 or above, don't close it, but be prepared to pay more than the minimum payment each month. Here's why: say the balance is $7,000 and you've been happily plugging along with the minimum payment (@ 2% of the balance) which is $140, it will take 21.5 years to pay that off! Now with the 24.99% rate your monthly minimum would likely double as credit cards don't like to carry out payment terms out to four decades or so. With a 4% minimum, your monthly payment is now $280 and that would take only 208 months to pay off. Now if you were to squeeze just another $70/month toward that credit card the balance would be paid off in a more reasonable 27 months. Let's also take into account that this trend will likely continue as credit card companies continue to scrutinize credit requirements and look to tighten their belts as we slip deeper into a recession. FYI the once magical credit score of 720 brought one exclusive offers at 0%, that minimum score has now grown to 740 out of an 850 point scale. Of course, the next step is to take that card out of the wallet or at least stash it in the back with the lint and coupons from 2007. You're on your own for that!!