Most consumers turn to their credit cards to finance the holidays. But this year, there’s more reason not to rack up credit card debt. That’s because of the new credit card legislation set to kick in February 2010. Bob Brooks, author of the new book Deceptive Money (www.deceptivemoney.com) and host of the Prudent Money Radio Show (http://www.prudentmoney.com), says consumers who charge more than they can pay off by January are making a very costly mistake.
There are two reasons, according to Brooks, if you carry over debt to February you are in for a big surprise:
1. Interest rates: In response to the new credit card legislation that will go into effect February 2010, credit card companies have raised credit card rates as well as changed them to variable rates. ANYnew debt created in this environment could end up being extremely expensive. The problem is that those variable rates are tied to a benchmark, and that benchmark has nowhere to go but up. As a result, the cost for holding debt for consumers will greatly increase over time.
2. Reduced credit limits: In response to the new credit card legislation, credit card companies have sought to reduce their own risk by reducing consumer credit card limits. As a result, credit scores can be drastically affected. One aspect of credit scoring is the credit utilization ratio. This formula looks at total overall credit that has been issued to a consumer and the amount of that credit the consumer is utilizing. An ideal credit utilization ratio is less than 30%. For example, take the consumer that has
$10,000 in total credit limits. If that consumer has 8,000 of debt on those credit limits, then the consumer is utilizing 80% of their credit limits. If the credit limits in this case are lowered to $8,000, their credit utilization ratio becomes 100% which would have a much more negative effect on the credit score.
As you cover the holiday shopping season, please consider speaking with Brooks.