Once upon a time (2008, to be exact), bankers were shrunken down into little white rabbits, wearing top hats, and sporting coat tails. These joyful little imps foisted one alluring 0% interest rate credit application after another in consumers’ faces, leading them down a financial rabbit hole. Consumers were giddy with dollar signs in their eyes, glowing from the purchase of their HDTV! And then one day, the magic money cards that they used to make such purchases stopped allowing such free spending. Consumers were tossed out of the rabbit hole.
This snapped many back to reality. Consumers could no longer afford the cable bill that gave their TV an even more special glow. They were at their credit limit, paying exorbitant interest rates, and barely capable of making minimum payments. Then, they lost their jobs. Since 2008, consumers have seen the credit card companies and banks not as happy rabbits spreading wealth and joy but as financial sorcerers who schemed to make them part easily with their money.
This whole credit crunch had one unexpectedly positive result (for consumers). It forced them to use credit cards in a more responsible manner, while paying down debts. Credit cards gasped (a bit) for breath, experiencing a drop in usage. Banks paused and stepped back, until they came up with their next scheme.
The financial sorcerers worked on the “responsible” credit card customers this time. Credit utilization beyond 30% negatively impacts a consumer’s credit report. Essentially, consumers are rewarded for having a lot of credit that is not being utilized. Customers with a $10,000 limit on a credit card should stop spending before they hit a $3,000 balance to stay under 30% given interest and fees.
If that wasn’t enough, in 2010, credit card companies diminished the credit limit for many of their customers to equal the actual debt they were carrying. So your $2,800 balance on your $10,000 card was suddenly maxed out. Overnight, these good customers, who were below 30% usage one day, over night were turned into customers worthy of outrageous interest rates. They were now at 100% utilization of their credit and were forced to endure an automatic review from the banks. The higher the debt to limit ratio, the higher the interest rates that banks can charge.
When your credit score is impacted this way, in many states it can impact your reasonable car insurance rates, and result in a consolation letter rather than a “You’re hired” email from potential employers. Insurance companies and employers are just two of the major players outside the credit industry who may look at your credit report.
By 2011, consumers gained ground, reducing credit card spending and their debt to limit ratios. They took into account how much that HDTV costs on credit versus cash. And the credit card companies realized they need their consumers to be more than just hanging on in order to make money.
They’re opening up the credit to consumers again. Fair warning – they aren’t doing this to be nice. They’re doing it banking on the hope that you will be tempted to use the credit they give you and once again fall down the rabbit hole of never ending minimum payments and high interest rates.
This is not an open invitation to dispel all your new fiscally healthy habits you have been grooming. Don’t be fooled again!