8 Dollars

Ahhh the infamous credit card... Who reading this doesn't have at least one lurking their wallet or purse at this very moment? Considering the news of abuses by the financial industry one almost expects, at any moment, to have the plastic beast leap from its hiding place and devour the cardholder before anyone can bat an eye, then lick it's lips and creep up upon its next hapless victim.

Well, maybe that is a bit of an exaggeration, but the power that financial institutions have over any American who uses money (that would be all of us) is terrifying. For those unfamiliar with the game it goes something like this:

Mr. or Ms. American decides they want a new ________ (fill in the blank), so they apply for a loan. The bank rep collects the necessary information and comes back moments later with a sorrowful look on their face. Sorry...you've been denied. What went wrong? Well, it could be a lot of things. An individual’s credit score hinges upon a myriad of scenarios. Length of credit history, utilization of credit, type of credit, debt to income and payment history all play into the equation.

Length of credit looks at how long you've been using credit. If you remember buying your first car you most likely required a co-signer (mom or dad) to back up your promise to repay the loan. Without a history or very little history creditors see a higher risk; fear of the unknown. This doesn't just affect the young...if you haven't used credit in a long time or always pay cash your score is probably being penalized for it.

Utilization looks at how much credit you have versus how much you are using. If you have two cards each with a $5,000 limit (total of $10,000 in credit) and one is maxed out you're looking at a 50% credit utilization. Anything over 10% will start pulling your score down. This is why closing out unused cards can be a bad thing. Using the above scenario, a responsible borrower decides they don't want to be tempted to use their free-and-clear card, so they close it out. Guess what, their utilization is now 100%. Ouch.

Type of credit includes revolving (credit cards), mortgages, auto loans, student loans and other loan products. If you owe someone money and they're not affiliated with the mafia, you'll see it on your credit report.

Debt to income ratio looks at the amount of debt you owe compared to the income you earn. This takes into account all debt minus anything that might be deferred, such as student loans. You want this percentage to be 36 or less.

Payment history is obvious. If you pay on time GREAT, you have month after month of on-time payments and your credit score is strengthened. One missed payment, however, and you will be haunted with bad credit for 7 years from the date of your offense. I know murderers who've gotten less time than that!! Not personally, of course, but you get my point.

The problem is that the financial industry is set up for those who use credit and it ENCOURAGES it. If you always pay cash you will have a weak credit score; nevermind that you are responsible with your budget and plan ahead for every expense. If, on the other hand, you play the game and consistently use credit to strengthen your score you run the risk of getting tripped up by the fine print that no one but the issuers attorney can read and understand.

Those of us with excellent credit sometimes have a tendency to look at those with poor credit and sneer. You just have to be more responsible, we cry! Don't borrow more than you can pay back! But keeping your good credit is a tight-rope act and financial institutions are always looking for ways to knock you off balance.

The downfall of someone with good credit is not always easy to foresee or prevent. Just like Vegas, this game is stacked in favor of the house. I found this out quite recently after I did a balance transfer to my 1st National Bank of Omaha card. I paid the balance off within 8 DAYS and forgot about it. A few months later I received a notice from my Sears MasterCard that they reduced my credit line from $9,000 to $250. That's right 9-THOUSAND dollars TO $250. I began to investigate.

It turned out that even though I paid nearly $200 to do the balance transfer through 1st National Bank they charged interest immediately on the balance, something none of my other cards had ever done. This left me with a balance of $8 after I paid the principle and fee.  Of course by the time I received the notification from Sears I'd already paid the remaining $8 off and closed the account (because of their annual fee). But this wasn't before they reported me as over 30 days late...on the $8.

Well, this had a domino effect. Not only did I take a hit for being 30 days late (on $8) but Sears MasterCard reduced my limit and a month later so did my Wells Fargo Visa, this time from $4,000 to $1,500 (needless to say I do not recommend either institution). Having your limit reduced acts much the way closing an unused card does...it lowers your available credit and increases your utilization which, you guessed it, impacts your score.

I have a few cards, some I am using some I am not. The problem is the more of a hit my credit takes after these creditors lower my limit, the worse my credit will be and the more harshly I'll be reviewed by issuers. It's a vicious cycle that I have no control over. 1st National Bank of Omaha, being the sorry company they are, refused to remove the report of 30 days late (on $8). "It was in your membership agreement (i.e. the fine print that no one but our attorney can read and understand)."

Unfortunately 30 days late is 30 days late regardless if it is on $8 or $80,000. It's no wonder people decide to walk away from their debts; if something so trivial as $8 can reduce your credit score to rubble why not make it worth your while and go for the gold? This situation illustrates the ridiculous amount of power these institutions have over us. Sometimes it's just easier to chalk it up as a loss and walk away.

I certainly don't espouse not paying your debts and you certainly want to pay close attention to any line of credit you are utilizing. The problem is that the rules are different for everyone and they are written to make the highest possible profit from their customers. If my credit takes a hit it's great for the financial sector because they can now charge me a higher interest rate on any loan product I might want to pursuit. Houses, cars, student loans... I'm sure for each notification of limit reduction I receive 1st National Bank of Omaha is getting a 'thank you' card.

I still have a few options I'm pursuing to get this removed from my credit report and re-establish my good credit but if they fail I'm stuck with it for 7 years. I'm not upset that I was reported, I was late...sure, I deserve it. But it's $8!! The least they could have done was rounded up so I was default on a double digit debt. $8 is embarrassing for me, it should be an embarrassment for 1^st National Bank as well.