With the new credit card rules having taken effect from 22nd of February, 2010, it’s quite clear that the credit card companies will now lose lots of money as the new laws impose restrictions on charging high rate of interest and various fees. It’s also evident that the credit card companies will now look for loopholes in the new act to charge various fees in order to make profit.

In such a situation, many consumers are worried about the annual fees, inactivity fees and other charges that can hit them for not using credit cards for a long time. Thus, it becomes a relevant question if a consumer should close his unused credit cards to avoid being hit by numerous fees.

Does closing unused cards affect your credit negatively?

Closing your credit cards can affect your credit adversely. This is because of the effect the credit utilization ratio has on your credit scores. It is actually a ratio between your credit card balances and the credit card limits. For instance, if you have a credit limit of $5000 and your credit card balance is $2500, you’re using half of the credit card limit and your credit utilization is 50%. If this credit card utilization ratio increases, your credit scores go down.

For example, let’s say, you have an open credit card with a credit limit of $4000 and credit balance of $2000. Now, you also have an unused card with a limit of 4000 and balance of $0. Your total credit limit will be $8000 and your total credit card balances will be $2000. Hence, your credit utilization ratio is (2000/8000) % or 25%. Read more

Credit report reflects your financial health, your credit worthiness. Whenever you apply for a credit card or auto loan or mortgage, your credit report is viewed by the creditor before offering you the loan. Any wrong or inaccurate information on the report can result in a denial by the lender. Hence, it is of utmost importance that your credit report contains accurate information.

The Fair Credit Reporting Act (FCRA) has given rights to the consumers to dispute wrong information on their credit report in order to get it removed. Here is how you can dispute effectively with the credit reporting agencies.

Order your free credit report: As a consumer you can order your credit report free of cost from all the three major credit bureaus, namely- Experian, Equifax and Transunion, once in every year. You can also order your free credit report from Annualcreditreport.com.

Scan the reports for error: Next, you should check the reports for errors. Make copies of your report while keep the original in file. Highlight all the inaccurate information on the report using a marker.

• Check if your name, aliases, address and SSN have been reported correctly.
• Check if the status of the accounts were reported/updated correctly.
• Check for items that are in your report past their duration, like  negative information would stay on your report for seven years; bankruptcy would stay for ten years and such.

Dispute in writing: Once you identify the erroneous information in your report, you should alert both the credit reporting agency and the creditor in writing to get it corrected. You should also attach documents like, canceled checks or bank statements, in support of your claim. You can take help of the sample letter to write to the credit reporting agencies (CRAs).

Send the dispute letter through CMRRR (certified mail with return receipt requested). You can also dispute with the CRAs online.

Wait for 30 days: The credit bureau would take 30 days to respond to your dispute. After verifying the information the credit bureau would contact you in writing with the result. If the dispute results in a change, the credit bureau would also provide you with a free copy of your updated report.

Sending demand letter: Ideally the credit bureau should conduct the investigation within 30 days of receiving the dispute letter but if you don’t receive any update after 30 days, you can send them a demand letter. In the demand letter you should ask the CB to remove the item from your report as the official 30 days of probing into the matter is over.

Your credit score can get affected for many reasons but a severe damage can be done to it by wrong items. Keeping the credit report error free would help you in rebuilding your credit faster.

The series of bad news aren’t yet over for consumers with bad credit. The changes in the credit card lending laws would now allow a bank to charge as much as 80% APR on its subprime credit cards.

It may sound impossible but it is true. Recently one of the premier national banks has decided to issue cards with interest rate of 79.9%. This is how the credit card issuers are exploiting the gaps within the new credit card law.

The new law is particularly silent on how much the lender can charge. It hasn’t placed an upper limit on the interest rate that a lender can charge.

Subprime credit cards for poor credit score customers

These high rate credit cards are targeted to customers with poor credit score. The banks are justifying these extraordinary rates by stating that they are exposing themselves to greater amount of risk by lending to consumers with poor credit.

Why the rates are so high on subprime cards

These subprime cards are especially designed for people with no or bad credit history, who can’t otherwise qualify for a standard rate credit card. Initially the issuers used to place several charges on these cards to cover the risk of lending to these customers. These cards were, therefore, known as ‘fee harvesting’ cards. But since the new law has restricted the fees on a card to 25% of its limit, the lenders have increased the rates to mitigate the risk of lending to subprime customers.

According to the creditors, people with credit score of 640 and lower are twice more likely to default on loans than customers with higher scores.

When the average rate of interest on credit cards is around 12%, issuers are charging 50% and 80% rates on subprime credit cards. The First Premier Bank, a subprime credit card lender, is sending mailers to customers for credit cards with 59.9% and 79.9% annual interest rate to observe market reaction. According to them, the consumer should be aware of the cost of obtaining credit when applying for one.

Alternatives to high interest rate credit cards

With the growing number of people affected by the credit crunch, more and more would find themselves having hard time in securing a credit card with conventional lenders following stricter lending rules and subprime lenders charging enormous rates.

However, there are alternatives available to customers in the forms of debit cards and secured cards. Consumers, who want to improve their credit and also those who want to build credit history, are encouraged to stick to their debit cards as it would limit their spending and also help them to stay out of debt.