Know Your Credit Limit Before You Start Christmas Shopping

Do you know the credit limit for each of your credit cards? It may be less than you thought, so look at your last credit card bill before you add even more charges during the Christmas season.

Issuers are lowering credit limits to help reduce the risks of their loans and to protect themselves from an escalating credit crisis. For some cardholders, this lower limit may be a costly surprise.

"In the past, we have warned cardholders about issuers raising credit limits without their awareness or approval. In the days of easy credit, issuers increased your credit limit even if you didn't need it. This gave some cardholders more credit than they could handle," says Bill Hardekopf, CEO of LowCards.com. "Now we are warning about the opposite action--issuers lowering credit limits without sufficient warning. Both actions can affect your credit score, but the lower limit can really get you with the extra fees and higher rates."

The typical consumer has access to $19,000 on all credit cards combined, and more than half of all users use less than 30% of their total credit limit. However, one in seven are using 80% or more of their credit limit (myFico.com statistics).

"This shows that almost 15% of cardholders are close to their credit limit and may be on the verge of credit problems. If you are at 75% of your limit, immediately stop
using your credit cards for purchases and pay down your balance," says Hardekopf.

Your credit score is an important reason to pay attention to your credit limit. The amount of debt that you owe is one of the most important variables in the credit score; it is 30% of your score. This debt utilization calculates the amount you owe compared to the amount of credit available to you. The lower this percentage, the better your score will be. Your score can be lowered when you use more than 50% of
available credit for each account because this indicates that you are a high risk. If your credit score drops, this is a sign of increased risk for creditors and all may increase your interest rates.

Here are some tips for living under your credit limit:

* Your credit limit is not your spending limit. Try to keep your balance at less than 30% of your credit limit.

* Monitor your credit card usage and spending. Sign up for email alerts to notify you when you are close to your limit. This is extremely important if your limit is low ($1,000 or less).

* Have a large cushion in case you have to use a credit card to pay for an emergency. If you are close to the limit with all of your cards, you are one emergency away from financial problems.

* Ask your issuer to decline purchases that will put you over your credit limit.

* If you have gone over your limit and it will take time to bring your balance back down, contact your issuer to work out a payment plan. Also ask them to waive the over-the- limit fees. If the first person you talk with says no, be persistent and try again. "Over-the-limit fees are not a one-time charge, you will be charged $39 each month you are over your limit," says Hardekopf.

* To help your credit score, have smaller balances on a few cards rather than being at the limit on one or two cards.

"If you are near your credit limit, you are in danger of falling into an expensive debt trap. One issuer could raise your interest rates because of perceived default and another could lower your credit limit for the same reason," says Hardekopf. "Either case could easily add fees to a situation that you already can't afford, affecting your credit score and rates with other loans. The only way to protect yourself is to pay down your balance and stay well below your limit."

More Changes Credit Card Issuers Should Make to Help Consumers

Yesterday, Chase Card Services announced the expansion of Chase Clear & Simple, a program designed to help Chase customers better understand and manage their accounts. One of the changes made was that Chase eliminated the practice of increasing interest rates for individual cardholders when their credit bureau scores decline. This change is effective on March 1, 2008.

"This is a good practice to eliminate and we applaud Chase for making this change," says Bill Hardekopf, CEO of LowCards.com. "Consumers have been complaining about the
unfairness of increasing credit card rates without reason, even though they maintain a good payment history with their card. It will be interesting to see if this helps consumers in the long run. Like most credit card issuers, the Chase terms and conditions still say they can make changes your account, including APR, at any time for any reason."

This is another change following the Congressional hearings investigating the credit card industry. Earlier this year, Chase dropped its two-cycle billing practice. Citi ended its policy of rate increases at any time for any reason, as well as the practice of universal default rate increases.

Here are some additional changes issuers should make.

1) Apply monthly payments to highest rate balances first. "If Congress was really serious about helping consumers, they would change the way credit card issuers apply monthly payments to the outstanding balance. Applying the monthly payment to the balance with the highest interest rates would save cardholders a lot of money on interest charges and help them get out of debt much faster," says Hardekopf. "Chase
states in their terms and conditions that you authorize them to allocate your payments and credits in a way that is favorable and convenient for them."

Currently, the monthly payment is applied to the lowest rate balance first before paying off the balance with the highest interest rate. That means the balance will continue to accrue unpaid interest as long as you use the card to make purchases. This practice keeps you paying on your balance with the highest interest rate until the moment you pay off your total balance.

"Consumers need to understand that they are paying off the balance on their lowest rates first. This is one reason why it may seem like forever to bring down a credit card balance. This is just another way for credit card companies to maximize the amount they receive in interest payments," says Hardekopf.

2) Make the Terms and Conditions easy to understand. "The issuers need to make all of the card terms and notices easy to understand. The notices about rate or term changes are complicated and include so much information, that you don't actually understand the change being made to your account," says Hardekopf. "Reward offers are also difficult to understand and it takes a calculator and some hard math to
compare different offers. The offer described in the big print may also be a little misleading after you read the small print."

3) More protection for consumers against rate increases. "Credit card issuers say in their terms and conditions that they can increase your rate at any time for any reason. If they decline your request for a lower rate, you can close your account, but there is nothing else you can do about it. The rate increase may spread to your other loans because your other creditors can check your credit report, see the increase as indication of increased risk and increase your rate with other loans as well," says Hardekopf. "All credit issuers should drop the penalizing practice of universal default."

Tips for Using Credit Cards and Gift Cards for Free Holiday Shopping

A new Consumer Reports survey says that 27 percent of those who received gift cards during the 2006 holiday season had not used one or more of them nearly a year later.

Before you start your holiday shopping, look in your purse, junk drawer, or car to collect all of your gift cards. These unused cards are a good way to tactfully "re-gift" and save a little money on your Christmas shopping.

Here are some tips for holiday savings using your gift cards and credit cards:

* Use unused gift cards for others on your list. "If you haven't used the card for yourself by now, you aren't going to miss it, and you will help your holiday budget by saving the value of that unused card," says Bill Hardekopf, CEO of LowCards.com. "This is also a good time to look at the fine print of each of your gift cards. If you wait over a year to use your gift card, you may start losing the value through a monthly fee that is typically $2.50."

* Use reward points for holiday shopping. If you have a reward card, you may have unused points piling up. Redeem these for gift cards or merchandise. For example, with an American Express Starwood Preferred Guest card, you can redeem 5,000 points for a $50 Amazon gift card, or 2,800 points for a $25 Pottery Barn gift card, a $25 Starbucks card or a $25 Gap card. Discover offers up to double cash rewards when you redeem your points for gift cards from their award partners such as AMC Theaters, Borders, Kohl's, Bed Bath & Beyond, or Macy's. You can give these gift cards away as gifts, or use them to purchase gifts, with no additional cash out of your pocket.

* Take advantage of reward partners to earn extra points. Many issuers have reward partners that offer extra points for purchases made with the card. For example, The Body Shop offers seven points per $1 spent with a Citi card. It also offers bonus points for purchases made at Target.com, eToys.com and Overstock.com.

* Review your credit card terms and conditions. Some cards have changed their reward terms this year, so don't assume that your card has the same terms as last Christmas. Some cards offer a higher percentage in specific categories, so make a plan to maximize your points. Log in to your account page to check for bonus points offers during the holidays. If you have more than one reward card, maximize your reward points by matching your purchase with the best points offer.

Tougher Economic Days Ahead for Consumers

The news each day seems to reveal more financial problems for both consumers and corporations. This week included the implosion at Citigroup, the largest bank in the country. Capital One also boosted its forecast for credit losses in 2008 by several hundred million dollars ($4.9 billion to the mid-$5 billion range). The attention has been focused on how these will affect investors, but consumers will also suffer
some consequences from these tough financial times.

"These are difficult days for many households and, unfortunately, they may get worse before they get better," says Bill Hardekopf, CEO of LowCards.com. "Not only are
households having to deal with their own budget and issues in their neighborhood, they are now also affected by global factors that have increased gas prices nearly 20% in the past two weeks, credit industry issues that are making it more difficult to get a low rate for a mortgage or loan, and a growing crisis in corporate banking that will probably increase the rates and fees for credit cards and other
accounts. And the holiday shopping season is about to begin."

The growing credit crisis could now start to have a greater effect on consumers:

* Banks will now limit their risk with consumer loans. They are going to be more selective about who they lend to and be more restrictive in screening applications for credit. That means it is going to be harder for many consumers to get any
type of loan. Their only options may be alternative lenders that charge outrageous rates.

* If you don't have good to excellent credit, it will be more difficult to get a new credit card. "The UK is going through its own credit crunch and stories there indicate that half of all shoppers seeking new credit cards are being turned down. Those who are receiving offers are paying higher rates and fees. I wouldn't be surprised to see that trend increase in the United States," says Hardekopf.

* Credit scores are going to be even more important as lenders keep a closer eye on borrowers. Your creditors areaware of every financial move you make. They judge every
loan, every missed payment, every time you use your credit card, and whether it increases your risk of default. If your credit score drops or your debt utilization ratio increases, they perceive this as increased risk and could increase your
rates.

* Credit cards are going to be a costly but possibly the primary option for financing things you can't afford. Until recently, many Americans used home equity loans to finance things they couldn't afford or to refinance debt. Home equity loans are no longer an option for many, and they are left with much more costly credit card loans to finance their lifestyle.

"Almost half of all families have a credit card balance. If you are to the point where credit cards are getting you through to the next paycheck, you have to make some changes to cut your spending. Running up credit card debt is costly
with interest charges, and your creditors are going to penalize you for it because you are increasing their risk," says Hardekopf.

* Beware of cash advances and other cash offers from credit cards. Even though issuers promote these, using them is just another red flag for creditors that you are strapped and need emergency cash. They are increasing rates and fees for
cash advances to compensate for this risk. Issuers say that cash advances are increasing, which can be correlated with future delinquencies.

"During the last two months in the UK, no less than 125 rates and fees increases have taken place in the credit card industry," says Hardekopf. "Issuers in this country could start to increase rates and fees with greater regularity if
the crisis continues."

The days of easy terms, and easy lending are over. "Consumers must learn how to manage their money to protect themselves. No one is going to be able to finance a
lifestyle with credit cards or other types of loans. At some point, you are going to have to pay for what you buy out of your own pocket. The financial golden rule should be, 'If you can't afford to pay for it today, you will not be able
to pay for it with interest tomorrow."