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2009 was a historical year in the world of consumer credit. We saw property values decline, lenders stop lending, credit card issuers crank up their abusive behavior, a new Federal law passed and a historically high number of credit related lawsuits. The following is a brief synopsis of 2009 and what consumer should do to put themselves in the best possible position for 2010.
Many of us received a letter (or letters) from our credit card issuers with similar messages;
· Your credit line has been lowered to reflect your spending
· Your account has been closed because we believe your card is being used in a manner inconsistent with your Cardmember agreement
· Given the size of your credit line and the way you have historically used your account, we have adjusted your credit line
· We are increasing the Annual Percentage Rates (APR) on your account to 25.49%
· A new service charge of $10 per month will be applied to your account
2009 was surely the year of the credit card issuers reign of terror against their cardholders. According to various surveys at least 35% of the population acknowledged experiencing some sort of adverse change to the terms of their credit card account. And, according to two FICO studies the median score for consumer who saw their credit limits involuntarily reduced was 770, which means that credit line decrease really didnt have anything to do with elevated credit risk.
Of course this abusive behavior lead to the passage of the Credit Card Responsibility, Accountability and Disclosure Act of 2009, or CARD Act for short. This act provides the following rights to cardholders, among others…
· A guaranteed 21 day grace period on payments
· 45 days advance notice of any interest rate increases
· Tough rules around issuing credit cards to consumers who are under 21 years old
· Restrictions on when card issuers can increase your interest rates, and a method whereby consumers can earn back their lower rates by making their payments on time
· Clearer disclosure of account terms before an account is opened
· Restrictions on over limit fees. If a consumer has not “opted in†to allow a credit card issuer to approve a transaction that puts you in an over limit positions, they have to either decline the transaction or not charge you the over limit fee
· No additional fees because of the method of payment
· No more double cycle billing, the method of using the prior months balance to determine interest charges for the current month
· Application of payments above the minimum now have to be applied to the balance with the highest interest rate
· Gift cards wont be able to expire for at least five years. And inactivity fees on gift cards will be banned
Unfortunately 2009 continued to produce decreased property values, which means no equity or worse, negative equity. And while consumers are comfortable with negative equity in their auto loans, they are not used to negative equity in their homes. Your home is your largest investment and it has historically increased in value. This leads to wealth building, a sizable tax deduction, and access to capital in order to send children to college, pay down credit card debt or fund home improvements.
The loss of home equity also lead to a significant number of home equity lines (HELOCs) being cancelled by lenders. A HELOC had always been a secured loan, secured by the perceived value in your home. But, with the home values dropping many HELOCS became huge unsecured lines of credit and many lenders simply werent comfortable with the lines any longer. The problem with the cancellations is that most consumers were never notified that their equity lines had been cancelled and didnt find out until they wrote a check from the line, a large check in many cases, which bounced.
2009 was also a banner year for attorneys involved in credit related litigation, specifically Fair Debt Collection Practices Act and Fair Credit Reporting Act lawsuits. The total number of these lawsuits filed in 2009 was over 8,000, which is more than any other previous year. Most experts predict similar numbers in 2010 because collectors are continuing aggressive collection tactics and more and more consumers are using the law to get legitimate errors removed from their credit reports.
In most years past filing a lawsuit to get something erroneous removed from your credit reports was an expensive and lesser-pursued strategy. But, with lenders increasing their minimum credit score requirements spending the money in order to have credit score-damaging errors corrected or removed actually is a newly smart investment.
So what should I do in 2010 in order to position myself in the best place? You can find yourself almost completely exempt from the credit crunch by doing two things; getting out of credit card debt and increasing your credit scores. By getting yourself out of credit card debt it allows you to escape the abusive treatment by lenders. Remember, things like interest rate and minimum payment increases only matter if you carry a balance. Getting out of and staying out of credit card debt puts you in a very enviable position. This is old advice that has taken on a new level of importance.
A second byproduct of getting out of credit card debt is the significant benefit to your credit scores. Debt makes up a whopping 30% of the points in your FICO® scores, which places it a close second behind whether or not you have negative information on your credit reports. And as many people have learned the hard way, the minimum score requirements to not only qualify but also qualify at the best interest rates have become more difficult to satisfy.
This means higher FICO scores equals approvals where in the past a higher FICO score meant an approval with the best rates.
