Spending Smart to Avoid Inactive Fees
By sbup Staff
The big credit card companies are struggling in the current economic downturn. They’re losing money as delinquencies go up and people cut back on their spending. To improve their bottom line, credit card issuers are closing accounts and trimming lines of credit. They’re also tacking on new fees, including a maintenance fee on inactive cards.
Administering an open line of credit costs credit card companies money. And if you’re not using your card, the card companies can't make money from interest payments or transaction fees. Some consumers already get charged a fee for not using their cards enough. For example, Chase (Stock quote: JPM) charges fees related to reduced activity on some of its cards. They refer to the charge as a "credit balance administration fee," and cardholders must pay the lesser value of $25 or the balance on the credit card for accounts that have remained inactive for 12 months or more.
Even if your credit card doesn't currently include that type of maintenance fee, that situation might change. There is a big incentive for companies to make changes to their fee and rate structures. That’s because a new law regulating credit card business practices comes into effect in July 2010. With that new law, companies won't have the same flexibility to make such adjustments to boost their revenues.
To avoid the fee -- or to avoid potential fees in the future -- you can either close the account or start using your card. But closing your account can hurt your credit score by reducing your available credit. Meanwhile, returning to a habit of spending on credit can be bad for your financial health. Best advice: Use your card for a small, required expense at least once every couple of months and pay the account off in full when the bill comes.
By limiting yourself to something small, you make it easier to pay the balance off in full at the end of the month. Restricting it to a necessary expense, such as groceries or gas for your car, means that’s money you would have had to spend anyways, and should already have set aside in your monthly budget.
Keeping your cards active but debt free is an important component to your financial flexibility. At least until the credit card companies come up with a new way to change the rules.