10 Ways to Protect Your Finances During a Credit Crisis

10 Ways To Protect Your Finances During a Credit Crisis

The mortgage debt crisis has quickly reshaped both the mortgage and credit industries. The years of easy access loans for almost any household regardless of financial situation are over. Adjustable rate mortgages are resetting and Congressional hearings to protect consumers may make it more difficult for Americans with poor credit to get a credit card. As a result, Americans are going to have to work harder to protect their finances and understand the debt they have.

"There is a lot of turbulence in the credit industry, but the lending had pushed so far out of balance, that it was bound to have a crash and a correction. The industry needed to make changes, but it is unfortunate that some households are paying such a large price," says Bill Hardekopf, CEO of LowCards.com. "The costs may increase for all types of debt, but there are steps consumers can take to get the lowest rates possible, pay down their debt, and protect themselves."


10 ways to Protect Yourself During a Credit Crisis:

1. Make increasing your credit score a priority. You will now need a higher credit score to get a loan. Last year, consumers with a credit score of 650 points out of a possible 850 could expect lower interest rates. The higher your credit score, the lower your interest rate will be and less money you will pay for interest payments, so increasing your credit score is very important. Start by getting your free yearly credit report at annualcreditreport.com so you know what is being reported about you and you can correct any errors and inaccuracies. Pay your bills on time. Keep your credit card balances low, under 35% of your limit for each card. Build a history with your accounts, get one or two good credit cards and keep them.

2. Prioritize your expenses. Pay the ones necessary for survival first such as food, housing, and utilities. This also helps protect your credit score because a missed mortgage payment can hurt your credit score.

3. Call your creditors (credit card, auto loan) and ask for a lower rate. For example, if your credit card rate is over 12% and you have a good payment history, call and ask for a lower rate. One can find the number on the back of your credit card or bill. Tell them you have been a good customer, and you would like a lower rate; that you have received several offers with lower rates in the mail and have researched cards with lower rates online; and that you want a lower rate on your card, or you will switch to another card with a lower rate. Ask what can they do to help you out.

4. Know the status of your mortgage and ask for a lower rate. If you have an adjustable rate mortgage, know how it will be readjusted to guard against the surprise of a sudden rate increase. If you are in danger of foreclosure or payment problems, contact your lender to ask for a lower rate. Washington Mutual recently announced that it is refinancing subprime loans at discounted rates to help homeowners avoid foreclosure. Mortgage lenders don't want to end up with unsold homes. Even if you have a good payment history and are not in danger of foreclosure, this may also be a good time to call your lender and refinance for a lower rate.

5. If you are in danger of missing a payment, contact your creditors as soon as you realize you have a problem. They may be able to help you work out a payment plan, lower your rate, or lower your monthly payment. It is better business for them to keep you paying your debt and interest payments and avoiding bankruptcy and foreclosure.

6. If you are in financial distress without a plan, contact a credit counselor. They advise on general budgeting, foreclosure, bankruptcy, and credit card repayment. They can help you walk through your household spending budget, suggest ways to cut expenses and pay down your debt. To find a legitimate counselor, contact the National Foundation for Credit Counseling, at www.nfcc.org or call 1-800-388-2227.

7. Pay attention to the notices you receive from your lenders by mail. Credit card issuers and other lenders have the right to change the terms and conditions of your loan; they just have to mail you a notice. Credit card issuers can increase your interest rate or lower your credit limit. If you are unaware of the changes, you could have an expensive surprise in your monthly bill.

8. Avoid using your credit card for cash advances. "This may be an easy way to get cash in a crunch, but it is extremely expensive. The rate is between 20-25%, and the fee is 3%. If you don't pay attention, this can put you over your credit limit which will generate a $39 fee and can cause problems on your credit report," says Hardekopf.

9. If at all possible, avoid tapping into your retirement account. Besides the benefits of tax-free growth and providing money for retirement, you will have to pay steep fees and taxes if you tap into your retirement fund prematurely.

10. Save for your house down payment. The days of 100% interest loans are over. Ideally to protect yourself, you should save 10% for your house down payment. "10% down payment used to be the rule. It is still a good idea because it is another protection to make sure you an actually afford the house and it reduces the monthly payment," says Hardekopf.

Back to the Basics for Borrowing and Lending

Some US consumers and mortgage lenders are in the middle of a loan and credit crisis. Lenders have quickly learned their lesson and are tightening their lending practices just to survive and stay in business. Consumers should take the same approach to their own finances and make changes for their own financial survival. It is time to bring some restraint back to our borrowing and lending.

The Federal Reserve has just released a report about the rise of U.S. household indebtedness. It says that says the ratio of total household debt to personal income in the United States has risen from an average of 0.6 in the 1980s to an average of 1.0 so far this decade, our debt is now equal to our income. The report tries to explain the causes and consequences of this dramatic increase. Reasons for the increase include financial innovations that have boosted household debt by relaxing constraints and lowering the cost of credit. It also says that the this cheaper and easier access to credit may encourage households with unreasonable expectations about their future income to take on more debt than appropriate.

"The rise in household debt is no surprise. However, I am surprised that this report seems unconcerned when it points out several times that the greater availability of credit makes it easier for households to smooth through temporary downturns in income. I am alarmed that debt is now just an acceptable way of financing life for many households. We are in trouble when credit cards replace emergency funds and expectations of appreciations in our home equity replaces our retirement savings," says Bill Hardekopf, CEO of www.Lowcards.com.

Many consumers who no longer have a home equity line as a source of credit are turning to credit cards. The Federal Reserve just reported that consumer credit rose at an annual rate of 6.5% in June to a record $2.459 trillion, the second straight significant increase. The increase was led by an 8.4% rate of increase for revolving credit, the category that includes credit-card debt (revolving debt increased 12.2% in May).

"The days of easy credit for almost everyone have quickly ended. Creditors are tightening guidelines and closely monitoring their consumers debt load," says Hardekopf. "This comes at a difficult time when income for most Americans has not significantly increased, but the costs of health care and energy have soared. Unfortunately, we are going through painful proof that there is no other answer for financial planning than to spend less than you make and to have an emergency fund to get you through the difficult times. Using a credit card to get you through may help in the short term, but you will eventually have to pay it off, and the 14-30% interest rate is a high price to pay."

Credit Cards Are Not a Good Option for Debt Consolidation

Should consumers turn to credit card issuers for debt consolidation plans? That is what Bank of America is trying to convince its cardholders in a letter offer with its Zero Balance Credit Card Debt Consolidation plan. This plan offers tells its valued customers that they are qualified to apply for up to $50,000 to pay off credit card debt, they can make no payment for three months, and they have the
chance to consolidate all of their credit card debt into one easy-to-manage account.

"Bank of America is presenting this as the chance the chance to transfer your debt and get rid of the minimum amounts and balances that never seem to go away, but the deal may not be as good as they describe. The letter advertises the lowest rate of 7.99%, which would be a good deal if that is the rate you receive and your current rates are much higher. However, the fine print acknowledges that your rate may be as high as 19.99%, based on your credit worthiness," says Bill Hardekopf, CEO of Lowcards.com. "They also say that the rate is not variable, but they may change your rate at their discretion. One of the reasons for increasing the rate is for additional advances. Not surprising, Bank of America encourages these advances by calling them "renewable" funds. If you pay down your balance, they give you the
opportunity to 'reaccess your account' to increase your loan back to your credit limit line."

Another problem is that while the Bank of America plan encourages the loan for debt consolidation, they will put the amount that is up to $50,000 right into your checking account. Then you can use the money any way you would like. "This large sum in your bank account can add a new temptation to spend on something besides your debt. It is easy to see how this could just get cardholders deeper into debt."

"Another 'benefit' for valued customers is they do not require a payment for 3 months. Of course, finance charges will accrue during this time. Certainly do not take this payment deferral option, it will unnecessarily and significantly increase your balance by the time you start to pay," says Hardekopf.

This offer is a good deal only for those who will qualify for a rate that is much lower than what you are paying. You also have to be absolutely certain that you can make each payment on time and that your goal is to completely pay off your credit card debt. If you have had payment and credit problems in the past and are struggling to make your minimum payments, do not turn to a credit card company for debt consolidation. The offer sounds helpful and generous, but the bottom line is that they are just trying to get all of your debt and the interest payments and fees that go with it to increase their own business.
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Mortgage Problems Benefiting Credit Card Industry

Recent stock market turbulence and doomsday headlines have brought sudden attention to the troubles in the mortgage industry. This is an important topic since the mortgage industry affects so many areas of our economy. Consumers are wondering if the credit problems might extend to credit card companies and if the issues will affect them.

The problems in the mortgage industry may be a small boost for credit cards said Bill Hardekopf, CEO of LowCards.com. "We have actually seen an increase in credit card applications. Since the credit is drying up with second mortgages and refinancing, this increase may be tied to some of the people with troubled mortgages trying to get credit elsewhere."

Figures released on Tuesday by the Federal Reserve tend to support the increase in credit card applications that Hardekopf has been seeing. Consumer credit rose at an annual rate of 6.5 percent in June according to the Federal Reserve report. Consumer credit had risen by an even larger 7.9 percent in May. The increase included an 8.4
percent rate of increase for revolving credit which includes credit card debt. The category of total consumer credit rose $13.2 billion in June to a record $2.459 trillion, which was double what economists had been expecting.

Since the consumer credit figure does not include mortgage debt, Hardekopf says it probably is showing consumers moving money from a troubled housing market and problem mortgages to credit cards. "When we had a rising housing market, consumers were using home equity loans to finance purchases. However, with the current problems
in the sub-prime mortgage market, consumers are shifting that debt back to credit cards."

Jerry Oldshue, a board certified creditor's rights lawyer with Rosen Harwood, PA in Tuscaloosa, Alabama, described the differences between the problem mortgages and credit cards. "They have different risks associated with them. Most of the problem mortgages are sub-prime to begin with, meaning they have higher risks. They are then bundled into a portfolio and sold to a group of investors who might not have a firm grasp on how risky those mortgages are. That has been the big problem. As these teaser rates for one and three-year ARM's have been adjusting, the borrowers have been defaulting and the investors in those mortgages have been getting burned. As the investors have stopped buying those sub-prime mortgages, the mortgage companies have been left holding the bag because they could not sell the mortgages to investors and that has been driving them in to bankruptcy. Credit card companies just don't have those problems associated with issuing credit cards. They have a better handle on the risk associated with the applicant."

Hardekopf says credit card companies typically have limited exposure to the mortgage mess. "The credit card companies assess their own risk when they approve an applicant. They also hold the loan in house so they are not reliant on credit markets. That is what makes them so different from the troubled mortgages. Unfortunately, the investors getting into the mortgage business did not understand the risks levels involved and they were relying on somebody else to do
that screening process."

Even though the credit card companies are not directly affected, they are closely watching the mortgage situation. "The credit card companies notice the problems. In July, American Express announced that it was putting almost a billion dollars aside, in case their credit card customers started missing payments. So they do expect some
problems from people not being able to pay their credit card bill because they are having trouble with their mortgages," says Hardekopf. "I expect that the industry may tighten their approval standards, but I doubt they will raise rates. They are almost overly sensitive to risk. They are currently being reviewed by Congress because of their almost punitive treatment of those who are rated as risky. If they see a problem now with a current credit card holder, they already have the ability to
raise the rates or impose fees. They can even raise rates or fees if they see you having a problem in some other area, like with a mortgage payment."

Credit Card Tips for College Students

If it is time to help your son or daughter pack for college, it is also time to talk with them about managing their finances, especially credit cards. In our plastic easy access for credit card payments and easy-to-get credit card offers. Parents must help their older teenagers find the right card, and teach them the correct way to use credit.

According to Nellie Mae, an incoming freshman who has no debt in September will have approximately $1500 in credit card debt by May.

"Handling credit cards is an important lesson parents should teach before their students go to college. Once they get to school, they are going to be surrounded by credit card offers and if they don't understand the process and the dangers, they can easily make costly mistakes with their credit," says Bill Hardekopf, CEO of LowCards.com.

"Parents try to prepare their kids to make good decisions when they leave home and are on their own. Staying out of debt and building a good credit score should be one of the most important lessons."

Unfortunately, recent changes by FICO have eliminated the option of simply adding your child to your credit card account to help them get their start.

"Parents need to know that they if they just add a their child as an authorized user on their credit card, it no longer helps build the authorized user's credit score. Fair Isaac, the company that created the FICO credit score, recently announced that its new scoring model will no longer factor the scores of authorized users into its
FICO accounts," says Hardekopf.

Authorized users on credit cards are those who are not responsible for paying the balances but are approved to make purchases with the cards. Often, authorized users are family members of a cardholder, such as a college student, who have little or no credit of their own. This change means that college students should apply for a credit card in their own name while they are in college because this will be the easiest time in their lives to get a credit card. If they wait until after college, they will probably have to start with a secured card or store card to begin building credit.

Credit card approval for college students is easier because credit card issuers evaluate each applicant based on risk and the likelihood of repayment. They know that college students are an acceptable risk because they have parents who will probably pay off their debt if there is a problem. However, unlike parents, credit card issuers are not compassionate, forgiving and understanding if the cardholder gets into debt trouble. There are consequences such as fees, rate increases, and most importantly, damage to their new credit score.

"Parents should start by sitting down with their kids and going over their own credit card bill. Explain about finance charges, grace periods and minimum payments. Explain about rotating balances and how much extra you will pay each year in interest charges if you only pay the minimum payment," says Hardekopf. "It is also a good idea to show them a copy of your credit report and the effect of credit cards and other debt on their credit score and future financial options.

"There are a lot of credit cards available and the choices can be confusing. Help your student shop around for the best credit card. Studies show that most college students apply for a card based on a direct mail offer. These cards often sound good in the promotion, but hide the true terms and fees, making it is easy for a first-time applicant to get the wrong card," says Hardekopf.

"Parents can help set some controls by making sure their new cardholder has a low credit limit of around $500 and request that they are not allowed to charge anything over that. Also make sure they sign up for alerts for payment reminders and approaching the credit limit."

Suggestions for college students using credit cards:

* Get only one card and pay it off each month. Stick with this card to build a long credit history.

* Only use credit cards for emergencies, not for gas, food/groceries, or clothes. machines and fast food restaurants. It is too easy to use the card for a quick meal or impulse purchase without considering the premium a high interest rate will add.

* Pay off the balance each month. 44% of undergraduates say they make more than the minimum payment but generally carry forward a balance (Nellie Mae). If they only pay the minimum on a $1500 balance from their freshman year, they will pay over $3,400 in interest and it will take 26 years to pay off (assuming 18% interest rate and 2% minimum
payment).

* Avoid department store credit cards, especially at a time when it will be easy to get a standard MasterCard, Visa or American Express. Although a discount to a favorite store sounds like a good idea, store cards have the highest rates available.

* Sign up for online alerts from the card issuer. They now notify you when you are close to your limit and before your payment is due.

* Avoid using credit cards for cash advances. The rates and fees are extremely high.

* Know your credit limit and look at it each month. The credit limit may be as low as $500.

* Pay your bill a week before the date it is due. Default rates also apply to college students. If you exceed the credit limit or have one late payment, the interest rate could jump to approximately 30%.