4 Credit Traps to Avoid
Think you're immune to the credit crunch because you pay your bills on time and have a decent credit score? Think again. Recent credit tightening has sprung a host of traps for unprepared borrowers.
Here are some of the problems you may encounter with credit and what you can do to get the upper hand.
1. You can't get car dealer financing
Many car buyers were surprised this spring to discover that dealer financing has gotten much harder to qualify for. A credit score that used to guarantee acceptance — say 650 — may no longer be enough.
If you need financing, check out several dealers. In recent months, GM's financing arm announced that it was reducing the minimum credit score it would accept from 700 to 620 and even lower. A lower score will likely mean a higher interest rate, but at least you'll get in the door. Check with other dealers to see if they’re following GM's lead.
2. Your credit card issuer closed your account
More and more banks are closing zero-balance accounts that have been inactive for long periods. This move can ding your credit score, particularly if you have high balances on your remaining cards.
Once an account is closed, there's not much you can do to bring it back to life. Instead, take preventive action. Use older, high-limit cards at least once every six months. (You can still pay off the balance within the grace period to avoid interest charges.)
3. Your home equity line of credit has been frozen
Particularly in regions where home prices have fallen dramatically, lenders are recalculating loan-to-value ratios. And that can mean a freeze on a line of credit backed by your home's value until you pay down your existing balance or home prices rise in your area.
You may be able to change your lender's mind with an appraisal showing your house hasn't lost as much value as others in your region. Ask your lender to recommend an appraiser so you can be sure they'll accept the report.
4. Your credit card interest rate is going up
Since last December several major credit card issuers have announced broad-based rate increases, particularly on cards with interest rates below 10 percent. The reason: to boost their profits or to make more money available for lending. If you've been a good customer for several years and your credit history is sterling (on all accounts, not just the card in question), try calling to ask to have your old rate reinstated.
You can also check with the company regarding their "opt out" policy. Credit card companies often give you advance warning of changes in the terms of your card and offer you a way to refuse the changes. The typical opt-out provision lets you continue to pay the old interest rate on your existing balance provided you agree not to use the card in the future.
