Wednesday, November 4, 2009

Opting out of APR increase doesn't have to impact your credit

By Jeremy M. Simon

Credit Score Report
Reporter Jeremy M. Simon
Jeremy M. Simon covers credit scoring and other issues as a staff reporter for

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Question for the expert

Dear Credit Score Report,
I wanted to know if it will damage my credit score if I opt out on a credit card that they just changed. I pay on time, but they are changing the APR to 29.99 percent. Will it affect my credit score? -- Marisol

Answer for the expert

Hey Marisol,
As with most credit scoring issues, the answer to your question isn't so clear-cut. While the higher annual percentage rate alone won't change your credit score, closing that credit card account could. For FICO credit scores, "It's all going to depend on what else is going on in their credit report," FICO spokesman Craig Watts says. "There is no one-size-fits-all answer."

For example, say you currently have $2,000 in overall credit card debt and a combined total of $10,000 available on all your credit card lines. But then you close a card with a zero balance and a $5,000 line of credit, cutting your total available credit in half. That leaves you with much more debt compared to your total available credit ($2,000 compared to $5,000, in this example) -- increasing what's known as your utilization ratio.

"When you close a credit card, you may increase that ratio, and that's not good for your score," Watts says.

From a lender's standpoint, a lower utilization ratio suggests you are less likely to max out your existing line of credit. You don't say whether you have other cards or what you owe on any cards you have, but if you have no outstanding debt on any of your open credit cards, it doesn't matter if you have a $10,000 line or credit or a $2,000 line of credit. Your utilization rate in either case is still 0 percent, and you're in great shape.

But there are other factors to consider. Some people may tell you that closing an older credit card account is bad for your credit score because it shortens the length of your credit history. Watts says that isn't true for FICO scores, however -- at least in the short term. "The FICO score formula, at least, looks at both open and closed accounts on a credit history," he says.

You still may want to think twice before , however, Marisol. After all, information from closed accounts doesn't remain on your credit report forever. All three major credit bureaus -- Equifax, Experian and TransUnion -- say that positive information from closed accounts, such as credit cards you always paid on time, only appear on your credit report for up to 10 years. Negative information, meanwhile, remains on your credit reports for seven years. So while closing that credit card account may not immediately lower your FICO score, losing the record of your on-time payments could hurt your credit score in the future.

Here's how:

  • Say your oldest card is 20 years old and your second-oldest is 8 years old, then you cancel the 20-year-old card.
  • That canceled card stays on your credit report for seven to 10 years, until it's anywhere from 27 to 30 years old and then drops off.
  • Once the canceled card drops off your credit report, your oldest card is just 15 to 18 years old. That means that you have a significantly shorter track record of success (15 to 18 years versus 27 to 30 years) than you once did.
  • Since length of credit history is a factor considered when calculating your FICO score, it means that your FICO score will likely suffer.

Whether you asked that the card account be closed -- or the bank decided to close your account -- doesn't matter to FICO. Although this distinction can appear on a credit report, "the FICO score doesn't care who closed the account. It's not factored into your score at all," Watts says.

Marisol, if you still plan to pay off the remaining balance on that 30 percent APR credit card and then close the account, you need to be extra careful with any other debt you still have. That means continuing to pay all your bills on time, not taking on additional debt and completely paying off any other credit card balances or loans, if at all possible. But rest assured that the consistent payments you've already demonstrated on your soon-to-be ex-credit card won't simply vanish immediately from your credit history -- and your FICO score -- when you close the account.

Suddenly facing a nearly 30 percent interest rate is a tough situation, Marisol, but it's not an unusual one these days. Luckily, cardholders still have choices. In your case, by considering your right to opt out of the higher interest rate, you're showing you care about making smart decisions when it comes to credit.

Congratulations and good luck.

5 credit card opt-out oopses to avoid

Make a mistake and -- oops! -- you face the higher interest rate

By Tamara E. Holmes

If you've responded to an interest rate hike on your credit card by opting out of the changes, which the Credit CARD Act of 2009 allows you to do, you may think you've dodged a bullet and avoided the spike in payments. But before you celebrate, be wary of mishaps that can nullify your agreement with your card issuer and have you wrestling with a higher rate and unfavorable terms once again.


In August 2009, consumers gained the right to opt out of credit card rate increases.

Opting out means the consumer can no longer make purchases with the card. Instead, the old, lower interest rate will be applied.

Credit card issuers must inform card users of the right to cancel when they mail the 45-day advance notice of the change in terms. The notice must explain the steps cardholders can take to exercise their rights to cancel, including a toll-free number to call and the deadline for opting out.

Don't slip up, or the new, higher rate will apply. For details , see the guide to the Credit CARD Act of 2009, or this opt out sample letter.

"If consumers decide to opt out of an interest rate increase for future balances, they still are going to have to pay off the existing balances, so that doesn't automatically cancel their card," says David C. Jones, president of the Fairfax, Va.-based Association of Independent Consumer Credit Counseling Agencies. "But it does eliminate the use of it unless they want to pay the higher rate."

In other words, if you use the card you've opted out of -- intentionally or accidentally -- you can kiss your interest rate goodbye. To avoid having the terms of your opt-out agreement revoked, take the following safety precautions:

1. Remove the card from sight. Consumers, on average, have 5.4 credit cards, according to credit card statistics from the credit reporting agency Experian. With so many cards on hand, it's not far-fetched for a consumer to accidentally pull out the wrong one when an emergency comes up. "We all want the security of knowing that if we break down on the tollway or the hot water heater breaks down, we have a card available," says Catherine Williams, vice president of financial literacy for Houston-based Money Management International. "But we have to understand that that is not the card to reach to." To avoid making a mistake that can literally cost you, cut the card up or put it in a drawer where you're not in danger of using it.

2. Check automated bill payment accounts. If you've used that card to pay bills online, make sure you cancel any automated payments because, again, the use of your card will tell your credit card issuer that you agree to the new terms. If you're switching your bill payment accounts to another card, do it early because "sometimes it can take up to 60 days for changes to go into effect," says Jones. Even if you generally use a different card for your online bill payments, make sure the card number you're no longer using isn't stored in the account, which can happen even if you've only made a payment once using that card.

3. Consider annual and sporadic fees. It's easy to remember what monthly bills you use your card for, but what about those charges that occur infrequently such as annual membership dues that are automatically billed at the start of each year? Don't rely on your memory. Instead, look at a year's worth of billing statements to see what charges occur infrequently so you can have them switched to another card, Jones advises.

4. Remember the season of shopping. With the holidays approaching, you may be visiting your favorite online retailer to buy some gifts. However, if you've ever shopped with the credit card you're no longer using, that card's information could still be stored online the next time you make a purchase. When you log on to your favorite retailers, check to see which cards they have on file. Make sure the card you're no longer using is not one of them.

5. Protect yourself from fraud. Approximately 7.5 percent of U.S. adults lost money through financial fraud last year, and the majority of them had their credit or debit cards compromised, according to the Stamford, Conn.-based research company Gartner. Unfortunately, thieves don't even need your physical card to do damage. "It used to be that I had to thump you over the head and steal your purse," says Williams. "Now I can do it electronically and you'd never even know it." The stakes are even higher if you've agreed not to use that card because a fraudulent charge could trigger your card issuer to change your card's terms to the higher rate.

Since you're not using this card anymore, take it out of your wallet and don't leave it laying around. If thieves do get hold of your card number and use it to charge something, call your credit card issuer immediately. By federal law, you're only obligated to pay up to $50 for a fraudulent charge on your credit card, says Frank Dorman, a spokesman for the Federal Trade Commission. You'll still have to convince your credit card issuer to leave your rate alone, which you should be able to do in the case of fraud, Williams says, but it's better to avoid fraud in the first place. "You don't want to be spending your time doing this," Williams says.