## How About a Credit Card with a 79.9% APR?!?

Beth sent me a link to this story this morning:

Credit Card’s Newest Trick: 79.9 Percent Interest

Basically, this bank used to charge \$256 per year in fees on a credit card with a \$250 credit limit. The new credit card laws limit fees to 25% of the credit limit. So,…the bank is now charging a \$75 annual fee and is jacking up the interest rate to 79.9% on a maximum credit line of \$300.

There’s no way around it, 79.9% is an extremely high APR. I ran a few numbers with a spreadsheet assuming the following:

January 1, 2009 – Get the card and immediately charge \$300.
February 25, 2009 (and every following month on the 25th) – Make payment of \$20.

On the statement closing date of December 25, 2009, the card would still have a balance of \$284 (and this doesn’t even include the \$75 card fee!).

Now, if this person were able to afford to pay \$30 per month, the ending balance would be \$137.

All I can say is at least the credit line is capped at \$300. At least people can’t go out and charge up several thousand dollar’s worth of stuff.

Also, since the card carries a higher APR and a smaller annual fee rather than the much larger annual fee, the interest charges can be avoided by not carrying a balance.

I’m just thankful I’m not in a predicament that would require me to pay off \$300 over time.

## Ignoring Your FICO Score Can Cost You Dearly

Check out this graphic I found on the myFICO website:

I took the information found in that chart and made another graphic showing just how much interest a person would pay over a 30-year mortgage depending on their credit score:

As you can see, the difference is significant. Just moving from the second highest to the highest FICO Score ranges saves you nearly \$10,000 in interest over 30 years (even more if you factor in growth on the \$27 per month payment difference). The difference from the lowest to the highest ranges, is nearly \$100,000 in interest expense over 30 years (or nearly \$200 per month)!

My advice to anyone looking to finance a purchase is to first GET A HANDLE ON YOUR FICO SCORE! The \$16 spent to find out your score is an investment—especially if you have no idea what your FICO score is. The information provided to you by myFICO is easy to understand. They also show you areas that are hurting your score and things you can do to improve it.

Then take the time and effort to improve your score. Remember the two most important areas of your FICO score are:

• How timely you are with your payments, and

• How much you owe compared with your total available credit.

I would keep those in mind, along with the other items that go into calculating your credit score (found here) if a major purchase in your future.

Related:

My FICO Score is 794. What’s Your Credit Score?

The 2009 Personal Finance How-to Roundup

Bureaus Roll Out New Credit Score Formula for 2009

How Long Will It Take to Improve a FICO Score?

## Money’s Tips For Raising Your FICO Credit Score

Here’s a couple pointers from the latest issue of Money Magazine on how to improve your credit score:

Remember your credit card utilization rate, which is your total card balances compared to your total credit limits. To calculate this, divide your credit card balances by the total available credit. Money recommends trying to keep it at 10% but says this will be harder to accomplish with credit card companies slashing available credit and closing accounts.

Keep your oldest cards in play. The length of your credit history plays a role in calculating your FICO Score so it’s a good idea to keep your oldest credit cards active. This could be something as simple as putting a monthly charge on your card and paying it off monthly.

One last thing, the article included a graphic that showed what goes into a FICO Score. They had a pretty graphic but I’ll break it down for you in percentages:

35% How timely you’ve been with payments.

30% How much you owe compared with your total available credit.

15% How long a credit history you have.

10% Whether you’ve recently taken on new credit/debt.

10% What mix of credit types you have.

As you can see, the first two are EXTREMELY important. DON’T BE LATE and DON’T CHARGE TOO MUCH!

Related:

My FICO Score is 794. What’s Your Credit Score?

The 2009 Personal Finance How-to Roundup

Bureaus Roll Out New Credit Score Formula for 2009

How Long Will It Take to Improve a FICO Score?

## My FICO Score is 794. What’s Your Credit Score?

After reading an article in the latest Money magazine about credit scores, I decided to check my wife’s and my score. I used myFICO.com found out my score was 794. Pretty good. It said that the only thing hurting my score was that I had 4 accounts with balances. One of those is our Visa Rewards Card and another is a Best Buy Card for a TV purchase we made at 0%, which will pay off in October. No big deal. Another account is a car loan that will pay off next May.

I then ran my wife’s number and found out it’s 802! GEEZ…

My wife has two accounts with balances, which helped her score. The only thing hurting her score was that she has 35 accounts. I’m going to look into this one. They don’t give much information on how to fix this one.

## Are Your Credit Cards’ Minimum Payments Going Up?

My post a while back about Discover closing my account, prompted an AFM reader to send me an email earlier this week, detailing some of his recent experiences with credit card companies. One of them involved his minimum payment going up from 2% to 5% of the closing balance. From his email (edited slightly for clarity):

I received a notice: “In order to make the account more profitable,” Chase is changing the minimum payments from 2% to 5%.

No mention is made about the promotional rates – I included a question to Chase about the minimum. Their response (paraphrased) was that the promotional rates were for rates only and did not include the amount of required payments. Yes, the minimum payments were changing effective with the August statement [no mention if August payment or ending date] and if minimums were not met, the account would be in default.

Continuing, they state they are doing me a favor by accelerating the payments and reducing the amount of interest I will pay in the long run. They then state if I cannot make the payments to contact their special account number to arrange payment at the higher interest rate, or close my credit line and the full amount would become due and immediately payable.

Just to be sure, I did some checking and sure enough, Chase is in fact raising minimum payments (see here).

As many of you know, this is a double-edged sword. As is mentioned above, the new minimum payment will bring the balance down much faster than before. On the other hand, the payment will go up significantly. For example, say you have a credit card with a \$5,000 balance. At 2%, your minimum payment is \$100. With the new 5% minimum, the payment would go up to \$250—a 150% increase. This is significant for several reasons:

1. People who are paying minimums could be doing so because they can’t afford to pay any more than that. Increasing their payment by 150% is not going to help.

2. Not being able to pay the minimum payment will cause the account to lose it’s promotional rate and the interest rate will soar higher, but the minimum payment will stay the same.

So why would Chase do this? Because of the fact that they can’t just raise interest rates like they were able to do. So, instead of raising rates, they increased the minimum payment, hoping people with promotional interest rates would default and become subject to the higher interest rates.

The article I referenced above did mention that some people were able to keep their minimum payments the same by calling Chase’s Proactive Solutions department (1-800-404-6220). The downside is that they will close your account, which could affect your credit score.

Of course the best thing to do is pay off all credit cards. But, I realize that that’s not possible for lots of people.

So, have any of you experienced anything like this?

## Watch Those Expiration Dates on Rebate Cards!

AT&T mailed me one of those Visa Rebate Cards for my BlackBerry Curve. I think it was originally for \$99 or so. I used the card a couple of months ago but still had a balance of \$8.19. I tried using it again but got the remaining balance wrong, thinking it was \$8.91 so the transaction didn’t go through. I called to get the correct balance and found out it was \$8.19. I put the card in my closet and sort of forgot about it until this morning.

I pulled it out and tried to use it only to find out that it expired on the last day of May!

OOPS!

I’m a little surprised at how quickly the card expired. I don’t remember for sure when I got the card but I think I received it after the first of the year. It seems like the expiration date would be longer than a few months.

Now, had it been a paper check, I would have deposited it into my bank account and the money would have been mine free and clear. I never liked paper checks. I thought the rebate card would make things easier but I found it to be a hassle—especially if it takes more than one transaction to use up the card.

Anyway, LEARN FROM JLP. Use those rebate cards quickly. Don’t allow the companies to keep your money!

UPDATE: I guess I’m not the only one complaining about the AT&T Visa Rebate Card.

## Darn. Discover’s Closing My Account Due to Inactivity

From Discover:

Dear JLP:

At Discover® Card, we are committed to working with you to manage your credit needs. This includes periodic account reviews.

Our latest review of your account shows that it is not currently active. we are sorry to see tha tyou have not taken advantage of what Discover Card has to offer.

Due to this inactivity, we are closing your account. Should you have any questions regarding this letter, please call us at 1-800-DISCOVER.

Sincerely,

Discover Card Customer Service

Good riddance! I never liked Discover’s two-cycle billing during the period in my life when I carried a balance. My guess is that I’ll be getting more of these letters from other inactive credit card accounts.

Have any of you experienced having your credit card accounts closed for whatever reason?