A Life Without Debt: Not Immune From The Credit Crisis

I knew it was bound to happen, but I’d been hoping that somehow I’d avoid it. Despite having excellent credit and no debt, we got a letter from one of our credit card companies dropping our limit from $10,000 to $300. This was done because of “inactivity” on our account, which really translates into the card company having way too much open credit on its books and needing to drop the excess.

This was our “B” card for use in an emergency, in case of loss of the “A'” card, or if we should find ourselves somewhere where the “A” card isn’t accepted. Regardless, $300 does us no good. We can’t travel with a limit like that or even buy the monthly necessities. So we canceled the card. We didn’t want to because it was one of our older cards and we knew our credit score would take a ding because of it. But the score already took a dip when they dropped our limit because our available credit dropped. Canceling the card ourselves was better than letting the card company cancel it, which I figured would probably be the next step. We rarely used the card anyway because it had a lousy rewards program so other than the ding to our credit score and the loss of our backup card, we haven’t really lost anything. But it’s still annoying to say the least.

After we canceled the card, we applied for and were given another card with a much better rewards program. We have a “B” card again. But the credit score took another ding because we had to apply for new credit, which we wouldn’t have had to do if the other bank hadn’t, frankly, screwed us.

Even those of us who don’t carry any debt aren’t immune to the havoc this economic crisis has wrought. Even though I don’t intend to get any loans, my credit score is still important to me. My insurance rates are determined by that score and if I ever have to go get a “real job” again, an employer can use the score to evaluate my employability. Granted I’m a long way from deadbeat territory, but it’s irksome to have my score drop because of things that were not in my control. I played by the rules, did everything right and still got burned.

I’m worried now that I’ll have to repeat this process in the not too distant future, with more dings to the credit score. Our “A” card is with a major bank that has been shutting down cards and slashing limits like crazy. So far we’re safe, but how long before our luck runs out? I wonder if I should go ahead and apply for another card just so I have another “A” card in the wings. Or should I wait until I’m forced to act? Will applying for these other cards cause this other bank to freak out and drop my limit or cancel the card? Will it look like excessive use of credit? If I wait, will I just have to hope they don’t drop the bomb in the middle of a vacation when I really need the card? I have no answers, but these are the things I find myself wondering about these days.

I never used to worry about my credit. I knew I had outstanding credit and I had my cards all in place. One for regular use and a backup. No debt. I was all set. Beyond checking my reports for accuracy and identity theft, I left it alone. I haven’t applied for new credit in years and my credit score has remained stable. Now I’m forced to mess with things I thought were long taken care of. I’m having to worry about getting new cards, canceling old ones, and trying to judge the damage this is doing to my credit score. I’m having to try to second guess the banks and FICO to figure out whether or not I’m making things better or worse for myself. Am I being proactive and protecting myself as a consumer if I get another card for “just in case” or am I opening myself up to more financial headaches? And down the pike it looks like I get to look forward to annual fees and deciding whether to pay up or change cards (yet again) since more cards are going down that road to generate more revenue. Credit cards are becoming a big pain in my butt, and I don’t even carry a balance. I feel for those that do.

Believe me, if I could live without a credit card I would. However, you basically can’t travel without one. You can’t rent a car without one and the holds put on by most hotels and ticket providers make debit cards almost impossible to use. I refuse to use my debit card online or keep a huge PayPal account, so I need my card to shop online. I also value the purchase protection and protection against fraud that you get with a credit card. So I’m stuck with a necessary evil and I’m stuck trying to figure out which direction to go in. This is not something I, as a debt free person, ever gave a lot of thought to before.

I only hope that, since the government sort of started this by enacting legislation regulating credit cards (which the card companies are trying to get around now, thus the rash of rate jackings, limit drops, and card cancellations now before the laws go into effect in January), someone steps in and changes how the FICO score is computed. It isn’t a model that can work or remain accurate as long as it reflects things that the consumer has no control over. When your limits drop or your cards are canceled and you’re forced to apply for new cards because a bank decided to drop you and not because of anything you did, you shouldn’t be punished for that. Or, if you’re going to be punished for it, insurers, landlords, and employers shouldn’t place as much emphasis on such a flawed scoring model.

Intellectually I knew it all along, but now I’ve seen personally how this crisis affects everyone, debt free or not. No one is immune to this crisis and it will change the way we all deal with credit going forward. Even the debt free have to worry about where this is all headed and what to do now. We all have to think about things we thought were set long ago and the impact our actions have on our futures. It’s not our fault, but it’s our problem.

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14 Responses to A Life Without Debt: Not Immune From The Credit Crisis

  1. Sadie – A fine article. Good to see your work back on these pages!

  2. That’s real inconvenient and not helpful to your credit rating.

    Just before shopping season!

  3. Jackie says:

    I’ve been worrying about some of the same things. I haven’t had any notices from my two credit card companies, yet, but the fact that I only carry two may hurt me in the future. If one or both decides to institute a yearly fee to use, then I’m stuck trying to decide if I want to pay that fee or take the hit on my FICO score to drop it and get another card. The one I’m most worried about is the one that has the oldest history. It is frustrating to have the habits that have succeeded for you in the past start to bite you in the present. If I weren’t trying to buy a house right now, I would have already gotten a third card to have in the wings in case the other two become unacceptable. Now, though, I think I’ll wait until after the new law is in place. I can eat a partial fee for a few months while I get my housing in place and then take my excellent credit to shop for a card later when they are more restricted on some of these shenanigans.

    The card I’m most worried will institute a fee is a rewards cards and frankly, if the fee is only $50 a year, I would still get enough rewards to make it feasible. However, I hate all of this stink they make about not making enough money off of customer who pay their balances every month. Everytime I make a purchase with my card, they make money off of the merchant with their transaction/convenience fee – so don’t tell me you don’t make money off of my activity – AND it’s a lot more than that $50 fee you want to charge me. That’s not them protecting their bottomline, that’s them being greedy. period.

    I also agree with your comments about the FICO. It is ridiculous for consumers to be dinged by things that aren’t their fault. Perhaps if enough people begin appealing the drops, the credit bureaus will make some changes once they see so many complaints. So, I hope you at least send a letter Sadie. I don’t see this as any different than any other mistake you see on your report. good luck!

  4. Rose says:

    I think you should have called the company that lowered your limit and complained. If you’re a customer in good standing, they’d rather make you happy than lose you altogether.

    My aunt just received a notice from one of her credit card companies that her rate was going up to 30 percent. She almost always pays in full, but on the chance that she needs to use it in a real emergency, she wasn’t happy knowing that she would be charged 30 percent – up from 12, by the way. She spoke to someone in customer service who lowered her rate back to 12 percent and apologized for the inconvenience.

    You’re just a number to them until you call and make a connection with a human being. It never hurts to ask – I’ve gotten my rate lowered by asking, and explaining that “XYZ card is offering 9.9%”.

  5. Bob says:

    the entire problem with credit is that we have it and don’t need it. Why be so worried about your credit score? If people were as worried about their health as they are their credit scores we would not have a health crisis today. Ask the millions of people who for whatever reason during this recession lost credit worthiness- they feel better and are getting on with their lives. Almost 1 billion Chinese live without it and their economy is growing. Imaging that.

  6. Joan says:

    Last year a CC company sent notice that my card was cancelled, some weeks _after_ that cancellation took effect! I have an oil company card that I have heard is probably cancelled(!), but they have not sent notice. I read people are finding out this oil company card account is closed when they try to pay for gasoline. I try to use my third back up card once a month to keep it active.

  7. Steven says:

    I struggled with credit dards during my college years and when I met my future wife she was struggling with them as well. Since then we have given them up and gone to a two debit card system.

    One card is with a financial firm where we hold all the emergency cash and savings and the other has the monthly expenses plus $1000 float we can adjust online. We never went back to credit cards but kind of use this system in the same way.

    I know we lose out on the credit history and rewards systems, but enjoy 800+ credit rating and have very little fear of our scores going lower or someone lowering the available balance.

    And while I hate the idea of using the larger card unsecured online – in an emergency we could use a cell to transfer the needed funds in a matter of seconds.

    Just some food for thought.

  8. Yep, I actually had the exact same thing happen to me just a month or so ago. I ended up applying for another rewards credit card which was even better (the Costco True Earnings American Express) so that was nice but it was still very annoying to get that letter especially because I have close to perfect credit.

  9. Heibi says:

    I agree with bob. I think you are stressing out too much on minor dings to your credit score, that aren’t going to affect you anyway.

  10. Minny says:

    In the UK the credit card company has a liability that protects the user. So, when we bought a bed from a company that went bust, because we paid with our credit card, we got our money back from them.

    Because of this we use the card to buy items over

  11. That’s a pretty shocking cut.

    I say screw them, and just get another one. It’s annoying, but they don’t deserve your business!


  12. Honour says:

    I figure these shenanigans are affecting the staff at insurance agencies and possible future employers in the same way it affects/lowers my score. FICO is just a rating company that’s gotten too full of itself. Who trusts it’s ratings now after the fiasco we’ve just witnessed.

    I too choose CC for rewards that I use. In the not-to-distant future, they will be pleading for our business once again, as they need the merchant fees and the pendulum has swung to far the other way as we over-react.

  13. Contrary to popular belief, if you DO NOT CARRY A BALANCE on your credit cards, you do not get a credit score ding when your credit limit is dropped. Why?

    Because the CC companies are looking at the ratio of available credit to used credit. If you have an available credit ratio of 0/10,000, your credit ratio is 0. if you have 0/300, you’re credit ratio is still 0. Ratio unchanged = credit score unchanged.

    If you have outstanding balances, then you get screwed on this ratio…

  14. John says:

    @whiteeyebrows: The item you are missing is that one part of the FICO score is age of accounts. If a old card is dropped the average age of accounts is affected. If there are only a few card this average can be hit dramatically. You are correct the utilization is not affected but other items are. I try to ‘stroke’ all my cards every year even with a small charge then pay it off even before I get the bill to keep my accounts active. The card companies do get a small fee for every purchase in addition to the interest they charge. A card that is out there not being used is an expense as well as a liability.

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