Kelly and I have long since kept zero balances on our credit cards. We’ve instead paid an annual fee on our card and enjoyed the perks of frequent-flier miles, free flights, and other rewards that they provide – all without costing us a fortune in interest.
Looks like our free ride is over, though. In the past few days, some of our credit card companies have sent us notices that the rates they charge for interest are going through the roof. The purchase APR will be jumping to 24.41% and the cash-back APR is rising even higher. The reason for this was clearly (and boldly) spelled out in the “other notices” section of the letter:
“The principal factor we considered in amending your account is maintaining profitability on your acccount.
We’ve got sterling credit and we never carry any balances. We only use credit cards for the rewards. In light of these strong-arm tactics by Chase and Capital One, however, we are seriously considering giving up credit cards altogether – or at least switching to the ones supplied by our credit union.
Think about all the Americans out there who are really struggling in this economy. Maybe they’re being forced to take an unpaid week off, or they’ve been laid off, or some other financial catastrophe has struck. What do they do? Banks want to gouge these people right when they’re most vulnerable.
First these big banks push to make it tougher for ordinary folks to declare bankruptcy, then they themselves beg for federal dollars to bail them out of bankruptcy themselves, and now they impose obscene rates on even their best paying customers? I hope Congress and Obama can reel in this out-of-control industry. I’m sick of ’em.
Mark, if you don’t carry a balance how will the APR affect you?
Also, you may want to carefully consider shutting down you credit cards because that will give you a pretty good ding on your sterling credit. Credit is affected by several principles and one of them is balance to credit limit ratio. If your two credit cards has a credit limit of 5k each then and you carry a zero balance on them and you have another credit card with 1k used of 5 k your current ratio looks good at 1/15. However, if you close the other two it will now look like 1/5 to creditors.
It also weighs more in your credit report than you would initially think so just keep that in mind.
Mark,
So lets see:
– Bankruptcy harder, caused by … Congress (but not Obama)
– Bailouts caused by … Congress (and Obama)
Why on earth would you be looking to Congress and Obama to “reel them in”? It’s not like people are being forced to get credit cards.
These hikes are in response to the bill that is being passed right now in Congress. These companies are seriously underwater, and credit card defaults are pushing 20%. They have to either raise rates, go bankrupt, or (most likely) get bailed out again. Since the people who are defaulting obviously can’t pay, that leaves one group who can – those who have good credit.
You are doing the one thing that needs to be done – terminating your cards with those companies that are trying to make you pay for other people’s mistakes. There’s nothing else that needs to happen. These companies need to go bankrupt.
I’m fine with that, aetius.
And we’ve got other cards, cards with the credit union, Scott. and the balances are all zero. So we’d still have credit if we got rid of the highway-robbery cards.
And even though the APR change doesn’t affect us as we don’t carry balances, it’s the principle of the matter. We’re fortunate, but there are plenty of others who’ve depended on their cards to get them through a tight spot. Those folks are getting hammered now and I don’t want to support them being gouged.
Mark,
Let’s take your logic and apply it to taxes. The people who provide jobs and pay taxes should not have to support the ones who don’t.
I like the way you are thinking!!
Be careful Mark. You could be accused of sounding conservative.
Mark,
I’ll show you some docs on how much that can hit your credit. I know you think it’s ok but I just want you to have that info before you close them.
Scootdawg,
First of all, sorry for the post hijack.
My wife and I have several cards with zero balance but still active (like 3 or 4). We also have 4 credit cards with balances. Would it be credit “smart” to go ahead and close out the card with zero balances? All of our cards are less than 50% of the limit.
Thanks,
Todd
A few years back, I met a guy who worked for Visa in Singapore. His job was to sell credit card packages to banks all over the Asia Pacific region. He seemed to be in a fairly senior position, with lots of exposure to how the banks operated.
I asked him whether Visa liked customers like me, who carried a zero balance every month. He said that about one third of their revenue came from folks like us (from the ~2% fee charged to merchants) and that the other two thirds came from interest.
Interesting factoid, especially in watching the banks struggle today.
Leonard/Todd,
It’s called your credit utilization rate and although I’m no expert, I know a little bit about it. Here’s a chapter from a book that tells you a lot about it and explains it better than I could.
http://www.slideshare.net/ramit/introduction-and-chapter-1-optimize-your-credit-cards?type=document
Go to page 15 and you’ll see the chart showing you that your credit utilization is 30% of your credit score! That’s a big percentage.
You’ll see on page 35 that he advises against closing out credit cards. Mark, you’ll notice that he says it’s ok to close out the cards if you have NO debt. Not just credit card debt.
Actually, read that whole chapter and he’ll show you some strategies to get your fees waived and your APR lowered.
Good luck!
oops, I noticed that there’s a discrepancy between the book page numbers and the document page numbers.
for the chart it’s document page 18 and the section on closing credit cards is document page 35. Also the section below the closing credit cards gives you a strategy to close a card and keep your score the same
Cool. Thanks for the info, Scott!