I normally do a little credit card arbitrage, to get the lowest rates possible. So when one of the credit card rates was set to increase, I did my normal little trick of moving it to one of the empty ones to maintain a low interest rate. I know this isn’t necessarily the smartest move for household money, but it’s an effective way to maintain a balance and still get a low interest rate. All told, doing this has kept me from paying more than 7% interest on any of my cards for years.

Anyway, I received a nice little balance transfer offer from Chase recently (3% up front, .99% for 6 months after that) and I had a balance on a card that had just moved to 18%, I decided to make the move. I calculated out how much I could move, including the up-front costs, and went online and moved the balances. No problem.

End of story.

Or so I thought. A few days later, I get a letter from HSBC, saying they’d lowered my (empty) credit card from a credit limit of $7000 to $305. And where did the $305 come from?!??

The letter had the standard blah blah about usage, credit record, and such. The one that caught my attention was the reason specified ‘The ratio of available credit to utilized credit is too high’.

Now, that’s true, on the one card I transferred the amount to. The OVERALL amount of available credit to utilized credit didn’t change at all. In fact, utilized credit has been going down steadily, as I’ve been in debt-killer mode these last couple of months.

It’s a Bad Bad Market Out There

Now I’m not particularly mad at HSBC. I haven’t used their card in the better part of a year, and I originally got the card because of the low intro rate for their balance transfers. It just goes to show that there are still more than a few banks out there that are scared of how things are going. Pulling in, and eliminating large available credit balances for customers is a way for them to keep themselves safe. Assuming they thought I was suddenly going to run up a huge amount of debt, then stiff them for the payments.

Ain’t gonna happen.

I’ve never (knowingly) missed a payment to any bill in almost 12 years. My credit rating should show that, and the banks and credit card companies should know that as well. It’s the banks that depend on a computerized algorithm to tell them whether someone is about to go belly up or not, that triggers these kind of cuts.

The one thing that does bug me about this is that I’m going to take a hit on the FICO score, because it will show a decrease in available credit vs. utilized credit. This doesn’t mean anything to me right now, but because getting new credit is becoming more difficult, this might cause me issues if I need to finance something relatively soon.

I’ve got paid off cars, a house within my means, and not that many bills left, so the odds aren’t too high. It’s just having the option to do something would be nice.

Have you had your credit limits reduced recently? We’d like to hear your stories and see if there’s a common thread or cause. Leave us a comment and tell us your story!

At first glance, this sounds like a whole new level of invasion of privacy on behalf of CompuCredit, but if you stop and think about it a bit, isn’t that what all the credit card companies do (by extension)? Sure, currently credit card companies can raise your rates if you miss payments. And there’s also the dreaded Universal Default which can trigger increases on cards other than the one you missed the payments on. They can and do track your spending, and can easily tell when you go on spending sprees. The difference here is that CompuCredit has done something proactive about it. The reason they’re in trouble is that they have raised rates and curtailed credit limits based solely on the spending habits of their customers. That’s a step farther than most card companies have been going. The reason they’re in trouble is they didn’t disclose the practice to the customer. Not that the DID the practice, but they didn’t TELL the people it would happen.

Can You Afford the Lifestyle of the Rich and Famous?

Too many people use their credit cards a supplement for their lifestyle, living the ‘good’ life and putting it on plastic. The part where most people get into trouble is living beyond their means. As Dave Ramsey is fond of saying;

“If your income is less than your outgo, your upkeep will become your downfall.”

Living beyond your means is the double-edged sword that credit card companies love. On the one hand, if you continually spend more than you make, you run up the revolving credit amount, which equates to more interest (and profits) for them. But on the down side, if you run up too much, you’re likely to default and either stop paying (causing litigation) or declare bankruptcy (forcing a write-off by the companies). It’s in their best interest to ‘manage’ you and make sure that you’re in their ’sweet-spot’ of spending; More than you make, but less than you can afford to pay in minimum payments.

CompuCredit specialized in sub-prime lending, meaning their credit cards targeted the riskier spenders, and carried a correspondingly higher interest rate. More risk, but more reward. To make sure they were actually making that necessary profit, they took the additional step of being proactive about watching their customers’ spending habits, and modifying the credit limits accordingly. If Joe Irresponsible suddenly goes out and spends $5000 in a week, where in the past he’s never spent more than $500, that might be signs of something brewing.

The part where they got in trouble (according to the report) is in the marketing of the card. They didn’t tell the customers that spending habits would adversely affect their credit, and that’s what they’re in trouble for.

Singling Out the Weakest in the Pack

It isn’t unusual for the credit card companies to monitor purchases. I can remember when I was younger and just starting out, I purchased some plane tickets, and a new bicycle ($700, I was really into cycling then) on the same day. Even though I was nowhere NEAR my limit, I still had to have a 15-20 minute discussion with the credit card company at the bike shop explaining why I was running up a couple thousand in purchases on the same day. They were being proactive in making sure the purchases were legit. In this case it was related to fraud, but it’s not such a big jump to considering purchases and relating it to normal spending habits.

Credit card companies can reduce their risk by keeping an eye on consumers that start suddenly living FAR above their means. This can be a sign of many things; Plans to default on payments (via bankruptcy for instance) and fraud, just to name a couple. If the card companies lose money, it eventually gets paid for out of our increased fees and interest rates, so in one way, it’s a benefit to the larger, more responsible credit card holders.

Do you think it’s right that credit card companies monitor your purchases? Leave us a comment with your opinion!

The weirdness begins when you start reading the details about the card itself.

No need to change banks or open a new checking account
You can enjoy all the great benefits of the Capital One Debit Card without ever having to change banks or open a new checking account. The Capital One Debit Card links to your existing checking account, similar to electronic payments for your mortgage, car loan, or gym membership. We will automatically deduct your debit card transactions from your existing bank account, wherever you currently bank.

From the Capital One website

So now, I don’t have to open an account with them, I can just get a card that magically pulls money from another bank as if it were connected to that bank.

So Impressed, I’m at a Loss for Words

I’m not quite sure how Capital One actually came up with this, or how they’re able to get away with it. They charge $19.95/month for this ’service’, when the debit card you usually get from your bank is free. You do get points for using this card, but you’d have to rack up quite a few sales to counteract the $239.40 annual cost of this card. *

Also, they offer to track your spending, thus you have to reconcile an extra card against your bank account now too. Yay!

Oh the Wonders of this Device

This card works almost exactly like your existing bank’s debit card. (Well, actually it works EXACTLY like your debit card to be precise, except your bank debit card probably doesn’t come with a fee). It’s recommended that it be attached to a checking account also, as the savings account and/or money market accounts will probably have usage limitations (preventing Capital One from withdrawing money more than a few times per month) .

They also mention that other banks might impose fees for this service from their end. I can’t imagine why?!?? Another bank attaches a debit card to their accounts, charges their customers $19.95/month year for the same service they’re giving away for free and they don’t get a piece of the action!! No problems there.

Competition Must be Fierce

While this is arguably the most interesting offer I’ve seen recently, I can’t for the life of me come up with a decent excuse for actually using this service. If I’m banking with a bank nowadays that doesn’t offer debit cards, I’m probably also limited to live-teller service and hand-stamped bank books at that bank too. Maybe someday my neo-Luddite bank will come into the 21st century, or maybe I could just switch banks to one that actually gives out free debit cards.

Sorry Capital One, no sale here.

Can you figure out a circumstance where this card would be useful? I’d LOVE to hear about it. Leave us a comment today!

* It was pointed out that the $19.95 is an ANNUAL fee, not a monthly fee. Thanks to Mrs. Micah for the correction

(Scene – a lone pilot in a small jet plane, swooping and swerving avoiding enemy fire and SAM missiles as they come at him.

Strains of Kenny Loggins’ "Danger Zone" playing in the background. Switch to flashbacks with the commanding officer telling the pilot how dangerous the mission is, but how important it is that the target be taken out.)

Pilot – Base, this is Creditwarrior making final approach to the target, request permission for weapons hot.

Base – Creditwarrior, you have weapons hot, over.

Pilot – (as he swoops down towards a small suburban house in the mid-west) Weapons hot! Fox two away.

(The pilot pulls up, taking four G’s of pressure, and flies off towards the horizon as the missile blazes directly towards the post box of the unsuspecting target. At the last minute, using correctional jets to stop in mid-air. A small arm opens the post box and deposits a letter. With a slight fizzle, the missile sputters out and drops to the ground. )

Pilot - Yeeeeeehaaaa! Direct hit base!

We Now Return You to Reality, Already in Progress

Ok, it might not have happened exactly that way yesterday, but the effect is basically the same. We received notice yesterday that one of my wife’s cards went from a $7500 credit limit to a $305 credit limit overnight. No explanation other than ‘we have re-examined your credit records and have decided,…" blah blah blah. The card was empty, and barely used, but it still was kind of a surprise, since my wife’s spending habits haven’t changed significantly in years, and she’s carrying no more or less debt than she usually does.

I even got a copy of her credit record for her a couple of months ago (as usual) and her rating is actually higher than mine, so that ’shouldn’t’ have been the problem.

So, Where’s the Beef?

The only reason I can think of is that she hasn’t been using the credit card, and HSBC decided they don’t want that much dangling credit out there for some reason. Does that bode bad for HSBC? That’s one way of looking at it.

It’s annoying only in the fact that it affects my wife’s credit rating adversely, because the credit balances vs. available credit ratio gets whacked.

Credit Utilization Level = Total Available credit / Total used credit = 30% FICO Credit score

Excellent ratios are below 20% utilization. Good are 50% or below, and the score gets progressively more affected the higher the ratio goes.

It’s a Wash

Since it’s a credit card we have in the sock drawer (sock drawer = never use) it’s not a huge loss. HSBC just goes on the credit card blacklist, and we continue on as usual. The FICO score is used so rarely nowadays, as we aren’t trying to get any more credit, that it doesn’t affect day-to-day finances.

Besides, on the same day, her CITI card mysteriously INCREASED the credit line on one of her cards. Go figure.

Do you have a story of a pre-emptive strike by a credit card company? Leave us a comment and let us know!

More and more credit cards are allowing you to pay OTHER credit cards, without accruing a cash-advance fee. Notably Bank of America’s American Express cards allow you to do this.

The Setup

Since automating your finances is one of my favorite financial advisories, this counter-intuitive action (using your credit cards MORE) actually helps you manage your finances better. Here’s what you need.

1. A credit card that allows you to pay bills/utilities from their web site.
2. A credit card with the lowest interest rate you can find, that still fulfills #1
3. A bank account with on-line banking

Now you can plan your strategy.

The Flow

The idea is to pay all your monthly bills with the credit card, then make one BIG payment (that covers those monthly bills at the end of the month). What this gains you is the guarantee that nothing gets paid late (if you set them up to be paid electronically) and you can get some additional time to pay the bills if one paycheck doesn’t have enough money to cover the entire amount. As long as you pay off the balance by the next month, there shouldn’t even be any interest accrued.

Bills In – Recurring utilities and standing bills (car, mortgage, and other credit cards) can be set up to be auto-paid on a particular day of the month, so you never forget them. And even if you don’t have the money available RIGHT THEN, they get paid, and you avoid a late-fee charge.

Money In – At the end of the month, or whenever you get paid, you can pay down/off the amount on the card holding the bills. You can do this automatically, with a auto-pay from your bank, or manually, when you get the bill.

The Benefits

Of course, there’s the obvious benefit of automating your payments. There’s also a ‘float period’ that you get from moving one payment along this ‘chain’. Up to about a month and a half before you actually pay the amount due. It doesn’t sound like much, but since you get this float effectively free, there’s no real reason not to take advantage of it.

Finally, if you use a credit card that gives you points or cash-back, you want to run as much of your normal finances through it as you can to accrue the benefits. You’re going to have to pay these bills anyway, no reason not to get a little extra for the effort.

Many people get uncomfortable about using credit cards to pay other credit cards, but once you get over that mindset, you can game the system in your favor. It’s even better for the credit card companies, as they get a percentage from the companies you’re paying with their card.

What do you think of this credit card trick? Let us know in a comment if you like it or don’t like it.