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New Credit Card Fee Could Harm Consumer Credit Score

By Sally Maison
Published: Wednesday, January 13th, 2010

With credit card losses reaching their 20-year high last year, card issuers are now eyeing for ways that would keep them from losing more in 2010 and would help them get their income back on track. Recently, they have re-introduced a fee that cardholders have not seen on their bills over the past few years: the inactivity fee. While this would bring more money to banks, experts warn that this new fee could hurt a credit score.

February last year, AmEx, the largest card issuer by sales volume, saw its charge-off rate go up to 8.7 percent while Citigroup saw its charge-off rates go up to 9.33 percent. To avoid seeing more cardholders who will not be able to pay their debts back, card issuers are looking for early signs of default and are closing as many risky accounts as possible. By the end of this New Year, Wall Street analyst Meredith Whitney predicts that the United States’ card line will be cut by 50 percent—equivalent to an economy-shaking $2.7 trillion decline. Since closing more accounts would only cause banks to lose more, they are now finding new ways to recoup previous losses.

Many consumers do not want to see more fees on their plastic, but they are hesitant of cancelling their accounts because they do not want to see their credit score drop.

People who carry huge balances are especially vulnerable to decline in credit rating since it could make their debt-to-credit ratio go up drastically. Finance advisers explained that “amounts owed” makes up 30 percent of a FICO credit score. A portion of this is calculated by how huge the balance a person carries in comparison to his credit line.

Now that some banks are already charging inactivity fees, consumers who no longer use cards are forced to choose between paying the new fees and reactivating their plastic. Not choosing any of those options could only make their credit ratings decline. Moreover, if they do choose to avoid new fees by closing their accounts, which is now allowed under the CARD Act, consumers could well expect their credit score to go down.

However, instead of getting more worried about their finances, experts advise consumers to create new budget plans for 2010 so they can keep their cards active without having to carry more balances. They suggest using credit cards for making little purchases at the department store or bookshop then paying those balances off each month. This will not only help them avoid inactivity fees, it would also improve their credit score.

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