Making payments on time helps credit ratings. However, opening a new credit card will reduce your score for two main reasons. Primarily, the score goes down because now the consumer has more credit availability. Even if the balance is paid in full monthly now, the new credit card limit is potential debt that could be maxed out during hard times. The FICO score is a combination of many factors including debt to income ratios. Secondly, credit cards are unsecured debts and get paid last in bankruptcy. It is a bigger credit risk than another form of debt such as a secured home equity line.

Your credit score is a three digit number based on how much open credit you have, how you have paid your bills and other issues that would affect how credit worthy you are. This three-digit number not only affects if you will qualify for credit, but it also affects how much you will pay for credit, insurance etc. From the lender’s standpoint, this number assists them with determining the level of risk they are taking when making you a loan. Credit scores can range from 300 to 900, and while the actual formula for calculating that score is proprietary information, you should understand that each of the factors used to calculate your credit score is weighted differently. Approximately 60 percent of your score is based on your payment history and outstanding debt. Your credit score can drop when you sign up for another credit card for a variety of reasons including: New inquiries have been made (by the new credit card company) regarding your credit and your total debt to available credit is high. Generally speaking, a drop in your credit score does not trigger penalties from the credit card companies, but it can mean that the interest rate you pay for credit may be higher than the rate that someone with a higher credit score would pay. The bill in the House of Delegates is meant to block the practice some credit card companies have of raising the interest rate on the outstanding credit you have if you are late on any payment to anyone. For example, if you are late making the payment for your phone service, certain credit card companies will immediately raise your interest rate, even though these two entities, the phone company and your credit card company are in no way related. Doesn’t seem fair at all does it?

Having good credit can be a blessing but it can also be a curse. Those that use credit tend to have more companies that wish to extend them even more credit. Applying for and receiving a credit card is an open line of credit or revolving credit. What that means is that even if you pay your balance off in full each month, you have the ability to recharge on the account and thus when you apply for a loan, they will look at the credit card as possible debt whether or not you have a balance. Therefore, if you have a bunch of cards even with no balances, it will be counted as if you have debt to the extent of your card limits. People that also apply for a lot of credit cards tend to have more credit problems over time so that is a negative for lenders. As far as penalties for your credit score dropping, I agree that it is unfair. However, it is incumbent upon the borrower to understand all the terms within their credit card agreement before they sign it. These penalties should be outlined in the agreement. The biggest problem that we face in the U.S. today is the massive amount of credit card debt that the average household owes. Recent statistics showed that average household credit card debt was over $10,000! The penalties are bad enough but the interest that is being paid by Americans for this debt is outrageous! In the end, it is the consumer’s responsibility to use credit wisely and understand the costs.

I’m with the banks on this one. Credit card debt is unsecured and poses risk to the lender. Let’s face it: You don’t have to have a credit card. People cut up their credit cards every day for either lack of discipline reasons or as an act of defiance. One thought you may want to consider is why not carry just one (max two) credit card(s) with the highest limit and desirable terms you can get? If a consumer is worried about high interest rates and fees, perhaps they should return to the “cash is king” mentality and not give any interest or profit to the “evil” credit card companies/banks. The amount of interest we are talking about here is minimal compared to the new taxes that have been forced on the residents of Maryland. I can only dream that the politicians that sponsored and have signed on to this bill will go after a reduction in Maryland taxes, which affect everyone, with as much passion and cheerleading.