FICO hostage

This guest post comes from Andrea at Fools and Sages.

Have your credit cards started adding annual fees yet? Not the ones you use -- that would be silly. The banks will gouge you in other ways for those. I’m talking about the ones that you don’t use.

It turns out that maintaining those cards is a pricey venture for the poor, downtrodden banks.

I received notice from Citibank last week that a card I haven’t used in, oh, seven years will begin having a $60 annual fee starting April 1. The only way for me to avoid this fee is to use the card, to the tune of about $200 per month in charges.

That’s not that much and I could actually easily wrangle a way to do it, except that I don’t want to. Our family is trying to whittle down credit cards, not add usage. But closing this particular card down would be particularly damaging to my credit score. Not only is the limit very high, but I’ve had the card for ages. In the “decades” range. Closing it would take away one of my oldest lines of credit and would dramatically impact our available credit, two of the factors that go into the computation of your FICO score.

It’s not just Citibank adding these fees, of course. From the Los Angeles Times:

Bank of America Corp. unleashed its own annual fee of as much as $99 on some cardholders last month. JPMorgan Chase & Co. and Wells Fargo & Co. both say they have no plans to introduce such fees, but it’s probably just a matter of time.

Citi isn’t saying how many of its millions of cardholders nationwide are subject to the new fee, which takes effect April 1.

According to that same article, closing an account can impact your FICO score up to 100 points. That is insane.

• Bing: The worst banks in America

To illustrate what a change in score of 100 points would cost you if you were to take out a new 30-year mortgage, we can use a handy little calculator that the FICO people were kind enough to put on their site.

Let’s say you have a credit score of 725 before Citibank told you that your inactivity is causing them too much financial distress. If you wanted to take out a $150,000 mortgage, you would be looking at a rate of about 4.834% (as of March 8, 2010). The total amount of interest you would pay over the lifetime of the loan is $134,430.

Now, let’s say you close your account with Citibank because you don’t want to pay their stupid fee -- if you’d wanted a card with an annual fee, you would have chosen a different card in the first place, right? -- and your score drops to 625. Same loan, same principal amount, but because you did NOTHING -- no late payments, no foreclosures -- besides tell a bank to close your account, your rate goes to 6.201% and the total interest paid on the loan is $180,768.

That is a difference of $46,338, about $130 per month.

It sure seems, given an example like that, that paying the annual fee is worth it, right? But no -- that’s NOT right. I mean, if you’re actually shopping for a mortgage at the moment, pay the fee and get the mortgage, and then close the account so you don’t get hit every year after that, but that’s not the point!

Your credit score should be a reflection of your behavior, not of a bank’s revenue model. If you have good credit because you pay your bills and don’t overextend yourself, does it seem right that a bank could cause you to spend almost $50,000 more for a loan just because you don’t see a need to pay an annual fee on a card you don’t use?

The system is completely messed up. That’s all I’m saying.

Related reading at Fools and Sages:

• Fun with big banks
• Interest rate vs. APR
• Tenants have rights too, you know