The passage of the credit card bill last Friday has the credit card industry all shook up. The legislation contained in the bill will change many of the fundamental practices of the credit industry, some of which were downright abusive. The bill will be implemented after nine months, giving credit card companies some time to adjust to the new legislation.
Credit card industry practitioners have constantly been issuing warnings that the passage of the credit card bill would mean making less credit available for consumers. The credit card industry says that, when the bill passes, it will mean that introductory interest rates will increase and annual fees will once again be charged to credit cardholders, regardless of credit standing.
Another practice which experts are warning credit cardholders about is balance chasing.
Balance chasing is essentially when the credit card company lowers your credit line as you pay your balance. In the end, the cardholder gets a drastically lowered credit line even as he or she has paid off the balance of the credit card.
To illustrate, say for instance that a credit cardholder has a credit card with a limit of $10,000 and he has a balance on it of $8,900. Wanting to lower his debts and give himself some financial leeway, he makes a payment of $2,000. This leaves a balance of $6,900 and he would expect to have an available credit of $3,100. However, with balance chasing, the credit card company would actually lower the cardholder's available credit. In this instance, from a credit limit of $10,000, it will drop to $7,000. This will continue to cycle until the credit cardholder's credit limit will be far lower than the one that they started with.
Balance chasing has a very negative effect on the cardholder's credit score. Since the credit limit constantly remains close to the credit balance, it would seem that the cardholder's balance is always near his credit limit. It also makes the credit card essentially useless to the credit cardholder during times of emergencies because of the greatly lowered credit limit.
Although balance chasing is not widely spread for now, some industry observers see this as something that will soon become common practice. As the credit card industry continuous to try to limit their exposure, balance chasing becomes more and more appealing.
Obviously, balance chasing will it hurt most for those with a balance in their credit cards. It becomes more and more important for cardholders to payoff their balances as quickly as possible to make sure that they have credit available when they need it most. Consumers should turn away as much as they can from using their credit cards and either use cash or debit cards instead.