If you’ve sworn off credit cards as a way to control your spending, think twice before cutting up your plastic for good. With major credit card companies shutting down dormant accounts, your credit score could take a big hit if one of your high-limit and long-term credit cards gets terminated.

Most companies review an account that’s been inactive for more than a year — meaning no charges or transfers during that time. The reason? It costs companies just to manage an account, even an inactive one.

With credit card companies like American Express (AXP Quote - Cramer on AXP - Stock Picks), Citibank (C Quote - Cramer on C - Stock Picks) and Chase (JPM Quote - Cramer on JPM - Stock Picks) all looking to cut costs, they’re choosing to either impose a maintenance fee or simply close the account down, sometimes with no advance notice. “We think it is unfair, but understandable in this market,” notes Linda Sherry, director of national priorities at Consumer Action, a national nonprofit consumer education and advocacy organization. “We recommend that consumers who are saving a card for a rainy day should use the card several times per year, and pay the balance back in full that month.”

Keeping your card (or cards) active provides more than just a backup in the event of unforeseen expenses; it also adds positive information to your credit history. And your credit history is the first place a lending officer looks when you apply for a loan. A good credit score will help you land the best rates on loans, while a low credit score will block you from all but the most expensive ones.

Your credit score is based on a number of factors, including your ratio of debt to available credit, and the length of your credit history. Having a high limit account closed would lower the amount of your available credit, potentially pushing your overall debt-to-credit ratio above 30%. Carrying debt beyond that 30% threshold can knock down your credit score by up to 100 points or more. The impact on your score could be even larger if the inactive card is one of your older accounts — about 15% of your credit score is based on the length of your credit history. (Find out more on how credit card debt can hurt your credit score.)

So if you’ve stashed some cards away, try to break it out every now and then for small purchases. If your card was recently cancelled, try contacting the company to see if they’ll reopen the account. If they won’t, consider applying for a new card in order to keep your debt-to-credit ratio at a healthy level. Or, better yet, pay down your existing accounts to reduce your debt. For the latest credit card offers, head to BankingMyWay’s credit card section.

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ABOUT the most lucrative area in lending these days is the credit cards business. Despite everything the banks, the main issuers of credit cards, say there is room for rates to be lower – considerably lower.

Last week, the Association of Banks announced a reduction in credit card interest rates of between one and 1.5 percentage points with interest rates ranging from 13.5% to 17% per year depending on the type of credit. This is in addition to other charges such as late payment and annual fees.

This largely follows recent cuts in Bank Negara’s overnight policy rate (OPR – an indicator of the rate at which the central bank will offer funds to the money market), by one percentage point to 2.5% per annum.

Thus, the interest-rate cuts on credit card outstanding balances are not much more than should be the case to reflect the fall in overall interest rates.

Merchants who accept credit cards give up as much as 2% to 3% of the charge to the issuer. This will be shared between the credit card issuer, for example a commercial bank, and the credit card franchisee such as Visa or MasterCard.

Let’s assume the issuer gets 1.5% of the transaction amount. If the user opts to finance his purchase, the credit card issuer, mostly a bank, charges an interest rate of up to 17% a year on the outstanding balance.

This is three times the average lending rate of commercial banks of 5.86% per annum for December last year! And this does not yet reflect the interest-rate reduction.

While the cost of funds to banks is not easily established, they are now likely to be around 2.5% a year. That gives a margin of up to 14.5% per annum (17-2.5). Add to this 1.5% as commission from the merchant and this goes up to a very nice 16%.

Overall bad debts are low at around 2% of outstanding debt for the banking industry even now. If we assume bad debts for credit card loans at three times this, or 6% of credit card debt, the net margin will be 10% (16-6) for credit card operations, a huge margin for what is essentially a lending operation.

With credit card debt outstanding as at end of last year of RM22.8bil, that means a profit to banks which issue credit cards of some RM2.28bil a year.

The maximum lending rate for credit cards should be about five percentage points extra instead of the 10 extra they get now for the additional risk they take or a maximum lending rate of 12% (17-5). In fact, that’s what some credit card companies offer.

For those who live on credit from these cards, it’s well to remember that interest rates are inordinately high. It’s better to take a term loan and settle the outstanding amount and remember not to run up the tab again.

As for the banks’ argument that credit card rates should be high to discourage spending, we would like to say that such an assertion is just too ridiculous to merit comment.

Credit card issuers must set rates that reflect the cost of funds and a reasonable profit. They must not profiteer at the expense of those uninitiated in the wily ways of the finance industry.

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Retailers are offering deep discounts and ultra-low interest rates for credit cards. It’s a formula that lures many young people to use credit instead of cold hard cash. The dangers of bad credit are always there, but some East Texans are actually using charge cards to establish and build credit.

Credit is the payment of choice for more and more young people. Chuck Watkins works at Buckle in the Lufkin Mall. He, like many of his customers, uses a charge card to establish and build credit. “I absolutely had to have some credit starting out. For college kids, that’s the easiest way to go about building your credit for life, while you’re in school.”

Something Watkins said can be easy, if you follow some rules. “Definitely have a budget and keep up with your payments on time.”

Once you have built credit, it is increasingly harder to keep it–especially with bargain sales and lower interest rates.

Watkins said some of his friends are experiencing buyer’s remorse after their spending got out of control. “[They are] 23 years old. They have everything in their parents’ name and can’t do anything for themselves. They can’t even get an apartment.”

Credit Counselor Doniece Smith said a growing number young people are experiencing bad credit. It’s something you can fix using a free credit report. “It explains in detail what you did good, what you need to do, what you should have done. It’s specific to your credit report instead of speaking in generalities.”>>

Rebuilding your credit will take time and include setting measurable goals. “Contact each former creditor and find out what the balance is and what their terms and conditions are for pay-off. Pay if off, and then wait,” said Smith.

Those are tips Watkins said he has followed once before, however, his best advice came from his mom. “She always said never to spend the cash and the credit, it’s always has to be one or the other.”

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Cash-strapped consumers can expect a special delivery this holiday season: sweeping new rules on credit cards.

Federal regulators will unveil final rules within the next several weeks to restrict credit card practices seen as unfair or deceptive. Proposals would prohibit institutions from practices such as: increasing rates on an outstanding balance, except under limited circumstances; applying consumers’ payments over the minimum to maximize interest charges; and requiring a reasonable amount of time for consumers to make payments.

Consumers have spoken loudly in favor of curbing aggressive pricing. They’ve posted tens of thousands of comments on the Federal Reserve’s Web site, complaining about predatory lenders.

“Please stop credit card companies from committing unfair billing practices. … Honest people need an honest chance,” wrote Laura White in a comment on the Fed’s site.

Meanwhile, the credit card industry has reiterated concerns that the rules will damage its ability to manage risk, leading issuers to raise rates and cut available credit. Meredith Whitney, a prominent analyst and managing director of Oppenheimer & Co., agrees that the rules would tamp access to credit, and wrote recently in the Financial Times that the rules will lead to the “severe unintended consequence” of pulling credit from consumers to the tune of $2 trillion, or 40 percent of unused credit lines.

“With so many Americans relying on their credit cards as a major source of liquidity, it would be equivalent to a major pay cut,” Whitney wrote.

While there’s no crystal ball to peek at the rules before they are finalized, Ken Clayton, managing director of the American Bankers Association’s card policy council, expects that the Fed will “move aggressively.”

“What you’re going to see is an unprecedented change in the way consumers deal with their card companies,” Clayton said. “In light of the current economic uncertainties, it’s important that all of us understand the full impact of these regulations on consumers and the economy before we can understand (whether they are) successful.”

One point of contention regards the provision that would prohibit issuers from increasing the interest rate on outstanding balances. The regulators’ interim proposal allows for exceptions to this rule, such as when a minimum payment is not received within 30 days of the due date. The credit card industry has argued that the 30-day delinquency is too long, a position backed by the Office of the Comptroller of the Currency, the primary federal regulator of national banks, which account for almost 80 percent of U.S. credit card lending.

“We believe the proposed restriction is unnecessarily stringent and would severely curtail the ability of creditors to react to adverse changes in a borrower’s risk characteristics during the term of the account,” the OCC told the Fed in public comments. “The period should be long enough so that payment on the account is clearly late, for example, five days after the payment due date, and before a new credit cycle begins and the next periodic statement is prepared.”

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Excellent Credit (FICO: 750 - 850)

Excellent credit is the highest rating that you can get and has a 750+ FICO score. To achieve this score, you need to have managed your credit very well for at least 5 years. Some of the things you must have done include:

• Having a credit card with a credit limit of over $10,000
• Never declared bankruptcy
• Always paid off your bills on time and have never been late by 60 days
• You never been through a collection agency for collection of unpaid bills

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Good Credit - Above Average Credit (FICO: 660 - 749)

Good credit requires a FICO score above 660 and below 749. To achieve this score, you need to have managed your credit fairly well for at least 3 years. Some of the things you must have done include:

• Having a credit card with a limit of over $5,000
• Always paid off your bills on time
• Never been late by more than 60 days on any credit card, medical bill, or loan payment in the last year

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Fair Credit - Credit That Needs Some Improvement (FICO: 620 - 659)

Fair credit requires a FICO score above 620 and below 659. Some of the things you must have done include:

• Have a credit card
• Currently have a loan or had a loan in the recent past
• Credit limit on the credit card is less than $5,000
• Late in bill payment in the last 6 months

Please check out Fair Credit Credit Cards

Poor or Bad Credit - Limited Credit History (FICO: 350 - 619)

Poor or Bad credit requires a FICO score below 619. Some of the things you must have done include:

• Never had a credit card
• Had a credit card with low credit limits for less than a few years
• Have limited credit history because you are a student, or have recently moved to US etc.

Please check out Bad Credit Credit Cards

Most people struggle to avoid being stamped with a Bad Credit. This is considered to be an undesirable stain in one’s financial records and is not only possibly, but surely detrimental on one’s future financial endeavors such as application for loans, credit cards, etc.

It is a good thing then that flocking in today’s fiscal market are agencies that help individuals and corporations in the strategic placement of their finances, especially in dealing with fragile decisions. This includes the proper handling of a Bad Credit record, for an individual or company to still succeed in doing profitable business and win the trust of others.

Financial transactions involve a myriad of dealings. Credit is a stipulation of one’s asset to another. Similar to a loan, granting credit accedes to the non-immediate payment of the resource granted, thus creating a debt. The parties involved in the transaction, the first being the creditor or lender, and the latter being the debtor or borrower decide on fix terms for the repayment of the asset. When a party fails to fulfill his duties in the agreement, he is bound to have a Bad Credit for such transaction.

Credit is now a very common scenario. In the commercial exchange, this term is often interchangeably used with trade credit. Trade credit, however, is a more specific term used for the consent given to the delayed compensation for goods previously purchased. As credit applications can vary in range, these transactions are granted with caution. Some credit applications are not granted, especially to individuals with inadequate and unstable financial resources. Upon application, personal information as well as documents of financial history is required by an agency’s credit manager to evaluate the applicant’s ability to pay off the debt in the arranged payment scheme. A Bad Credit on a person’s record is instrumental for him to get an approval of another credit or loan application.

Loan applications are very particular with Bad Credit, this being the number one difficulty that most applicants have to deal with. This detail generates a number of implications on one’s personal credit history. This is assumed to define one a high-risk applicant, who is likely to cause future problems with the lender on loan repayment. However, these off-putting implications are not necessarily final for a credit and loan agencies today as Bad Credit personal loans are offered. There are also Bad Credit mortgage loans and corporate loans that are being offered institutions that are developing a flexible financial requirement, and provide opportunities to eager borrowers. Services to reinforce a tainted credit history are also available, such as a Bad Credit repair. This process involves credit rating from agencies and creditors, as well as detailed information on the credit limit of previous transactions, actual payment history, and current balances if there are. These are gathered to come up with an evaluative credit report on an individual or firm. Although most credit accounts inevitably contain downbeat credit ratings, having a Bad Credit does not necessarily mean a zero opportunity for financial supplement.