Tuesday, March 24, 2009

Credit Cards and Credit Crunch - the Other Monster Under the Bed

It is official - credit card default rates are higher, as much as 30% higher than last year, and higher than the experts thought they would be. Okay, how much of an expert did you have to be to know that. All you need to have, to know the defaults are getting worse, is a CREDIT CARD, or two or three or four or...

What are the reasons? That may require an expert. Could it be the loss of 4 million jobs, or the increase in interest rates even when the Banks are paying next to nothing for the money they are lending, or people using credit cards just to buy food and pay for heat until the cards max out, or homeowners making the last few mortgage payments they will be able to make with the credit cards, or is it just cardholders being irresponsible and using the cards to pay for filing bankruptcy?

It has been reported that the total outstanding amount of credit outstanding for credit cards, used or unused credit, will decrease by 50% or $2 trillion by 2011. Card companies are cancelling cards, jumping up rates (see earlier post), and telling card holders that the cards will not be renewed. Okay, let's just fold up our tents and go home. These are the same financial institutions that got bailed out again, today, by the Treasury. The thanks?

Advice for those of us who will need or think we will need to use revolving credit (credit cards) goes something like this.

1 Pay down or even off the cards that are charging you the highest rate.

2. DO NOT be late on any card payment - the issuer can cancel your card or increase the rate.

3. Do not apply for any new cards - the applications you make will not only affect your credit score but existing card issuers might look at this act as a need for more credit, and they are afraid you will not be able to pay

4. Review your credit reports carefully to be certain only real credit is reported, that only your debts are shown, and that closed accounts are reported properly. Go to the web site http://www.annualcreditreport.com/ and order one report from each of the 3 bureaus - Experian, Equifax, Transunion. Be sure you do not ask for your score - it will cost you to get that,while the report itself is free. Do get fooled by other sites like freecreditreport.com as you will probably end up paying for something

5. Decide if you really need credit cards, beyond a small limit card for emergencies. Try living without them now because you might not have them later anyway.

6. DO NOT TAKE A HOME EQUITY LOAN TO PAY OFF CREDIT CARDS. You are changing unsecured debt into secured debt, and the security is your home.

7. See a credit counseling service or a good debt counselor to help you determine the amount of credit you will need month to month. Even if the lesson costs $250, it is far less than the interest on even a modest balance when the rate is 30%.

Is there an end in sight to the craziness? No! Maybe a halfway point? Yes

Author's Copyright by Richard I. Isacoff, Esq., March 2009


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