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Legislation Loopholes Can Damage Credit Report

By Faye Mergel
Published: Tuesday, February 2nd, 2010

Legislators are eager to promote the interest of consumers and protect them from unfair lending practices. However, analysts say new legislations have unintended consequences which are costing consumers big time.

Legislation Loopholes Can Damage Credit ReportCardholders know that keeping their credit report impressive can save them lots of money. They could avail cards at lower interest rates and even get credit cards with very high limits. But as the CARD Act nears its full implementation date—February 22—banks have tried to change policies and terms in order to offset losses the new legislation could cause.

In the past months, many cardholders have seen their credit limit get cut off, making it difficult for them to make more purchases using the same old plastic. The reduction also pushed their debt-to-credit ratio way up, ravaging their credit report and their chances of getting better loan and card deals.

A credit report records how much credit a cardholder has and how much debt he has accumulated. If the debt-to-credit ratio goes up, it would appear that a person is close to maxing out his account, something he would not want to happen if he is planning to refinance a mortgage or buy a new car.

High debt ratios affect the creditworthiness of consumers, making them shoulder high interest rates if they get approved for a loan. In some cases, it is the reason why creditors refuse to grant a loan. Additionally, cardholders who have high debt ratios could easily to go over their limit, making it more likely to trigger penalty from their issuer. Federal law and even the new legislations do not prevent an issuer from lowering a person’s credit limit.

To avoid carrying over-the-limit penalties, specialists suggest asking issuers to deny any transaction that would push them overboard. Experts also advise cardholders to create a budget plan to pay down their balances each month. With low debt levels, consumers will not have to worry about their credit report.

Larger card payments may not be possible for many household amidst this tight financial squeeze but experts say it is one of the easiest ways to get out of card debts. They advise consumers to prioritize debt payments and to avoid further debt accumulation to gain more space financially.

Finally, experts tell consumers not to fall for debt settlement companies which lure cardholders by claiming they can reduce debts by as much as 50 percent. They explained that payments made through settlement are record on a credit report as such, and would definitely hurt a person’s creditworthiness.

Instead, experts advise cardholders to get debt counseling from non-profit organizations in order to come up with solid financial plans.

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