The latest buzz has been all about the first wave of credit card reform laws to have taken effect. On August 20, 2009, credit card issuers must give cardholders 45 days notice before making any significant changes to the terms of the cardmember agreement, and must mail out bills 21 days before the due date. This gives cardholders an extra 15 days notice of any such changes to the agreement as well as an additional 7 days of knowledge as to what the final monthly bill is. Under the act, the customers also have the right to reject any proposed changes made by the card issuers and in turn maintain the current terms while paying off the balance over the following 5 years. That is all well and good, but as a result of the Obama Administration’s credit reform act, many (if not most) credit card holders are seeing significant reductions in credit lines as well. What does that mean? The answer is simple: lowered credit limits paired with sustained usage equals higher credit consumption rates, which is a negative mark on your credit report.

The percentage of credit used compared to the credit limits is a part of a major piece of the credit reporting equation used my Fair Isaac in its Fico Scores/Reports. 30% of your credit score comes from the amounts owed classification of the credit score, which is quite substantial. The thing that nobody is particularly addressing when discussing credit reform is the impact on credit reports and subsequently, credit scores. Even without having any additional credit usage, any of us could see our credit scores plummet simply because credit issuers are tightening the purse strings and reducing the available credit to millions, regardless of prior history. Yes, there are no doubt people reading this thinking to themselves that if you don’t carry a balance then it wouldn’t make much of a difference, and you would be right in most situations. But what about timing issues, people taking advantage of 0% interest offers, and home equity lines (among others)? Not everyone who carries debt is doing something wrong is is out of control with their spending. I have stated on numerous occasions that credit can be a very useful tool if used properly.

It’s not simply an issue of credit scores for the sake of obtaining new credit lines alone. With all that has happened in the credit markets over the past couple of years, and even with TARP money, lenders are making less money available. People trying to take advantage of low interest interest rates in order to lower their mortgages, or even save their homes are getting the short end of the stick. People who are out of work are suffering due to the hits their credit scores are taking in conjunction with the increased use of credit evaluations when it comes to the hiring process. Then you have those who are looking to rent living spaces who could be negatively impacted as well. Even insurance companies are using credit scores to come to a final figure when quoting insurance rates.

The overriding issue is that people in general are not educated enough on the topic of credit. Many view credit reports and scores as nothing more than something that is affecting people looking to borrow money. They do not realize that it also impacts the previous scenarios: landing a job, finding a place to live, insurance rates, even being able to hook up utilities or a cell phone without putting down a security deposit. I am left to wonder if anyone took the time to consider the broader-range effects of forcing such change so quickly. It seems that almost every fiscal policy decision is intended to put out the immediate fires, but lacks the forethought to make a point of trying to prevent the fires from flaring up again in the future.

Perhaps now people will take financial and credit education a little more seriously and make an effort to learn about these subjects, if not to recover from a disastrous situation, then at least to protect themselves (as much as one possibly can) from getting into financial trouble down the road.

This entry was posted on Monday, September 7th, 2009 at 1:02 pm and is filed under general. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.