Two years ago, millions of ordinary people who'd never had any
problems borrowing money suddenly found themselves
unable to get the credit
they'd come to expect. In the aftermath of the credit crunch,
bailed-out Wall Street banks faced
for being slow to take the money that the Federal Reserve made
available to them and lend it out to their customers.
Now, though, it appears that that trend is starting to reverse
itself. Through a number of different initiatives,
credit card issuers
are loosening their purse strings and reaching out to consumers in
an effort to restore their profits. With borrowers returning to the
driver's seat in the volatile relationship between card holders and
the financial institutions that issue credit cards, it's important
to know which offers make sense and which are simply attempts to
separate you from your hard-earned money.
Credit on the rise
After a tough period for people seeking credit, the pendulum has
already started swinging back toward the free-wheeling days of easy
borrowing. A recent SmartMoney article cited figures showing
increased activity on a number of fronts. Credit-card issuers have
increased low-interest rate offers fivefold this year compared with
2009, and balance-transfer offers to existing customers have gone
up nearly 30% since the beginning of the year.
Moreover, after some attempts at novel approaches to raise
revenue in light of the limitations imposed by
credit card reform
, card companies are turning back to tried-and-true approaches
geared toward spurring spending. Among them are the following:
) have lowered their interest rates as part of promotional
offers. With double-digit percentage point reductions, savings
can be impressive -- and in some cases, the once-endangered 0%
offers are returning.
Bank of America
) are offering balance-transfer checks in an effort to grab
market-share from other card companies or simply to encourage
customers to get quick access to cash.
) are reportedly increasing credit limits for customers.
The moves come as the credit card industry has failed to keep
pace even with the slow recovery in the economy. A recent
card-tracking report shows that
haven't seen increases in credit-card activity despite an overall
increase in consumer spending. That's consistent with consumer
credit statistics from the Federal Reserve, which suggests a trend
toward debit cards or cash as alternatives to credit-card debt.
Good news for smart cardholders
It's good to see credit-card companies focusing on their existing
customer base rather pulling out stops to grab users of competing
incentives that can save you money
are good for consumers. What you have to keep in mind, though, is
making sure you don't fall into the traps that card companies are
laying out for you.
For instance, balance transfer checks may look like a great
deal, especially when combined with low interest rate offers. But
when you read the fine print, you'll find that a $10,000 balance
transfer may cost you between $300 and $500 in upfront transfer
fees. Moreover, card companies hope that you won't repay the
transfer before the promotional rate expires, when you may well see
your interest rise by as much as 20 percentage points.
Even higher credit limits can carry risks. By itself, a higher
credit limit can
your credit, as your credit score is partially based on the
percentage of available credit that you're actually using. So if
you simply keep your spending habits the same, then you could see
your credit score go up. But if you do what the card companies want
you to do -- use the higher limit as a way to encourage you to keep
higher balances on your cards -- then you could end up both deeper
in debt and with a worse credit score as a result.
Don't get cocky
Whenever a credit card company gives you better access to credit,
it's a potential victory for customers. But what looks like victory
can turn to bitter defeat in a hurry if you're not careful. Only by
managing your credit
and refusing to let card incentives drive your behavior will you
get the most from your cards -- even if the banks aren't
necessarily happy about it.
Smart credit management can make it a lot easier to retire.
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to read the Fool's new special report, "
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