Tips for Surviving the Credit Crisis
Because of the U.S. economic crisis, you'll find that credit cards and loans are more difficult to obtain, but here are some tips to
survive the credit crisis.
Use your emergency fund (not a credit card) for emergencies.
You should have between three and six months of living expenses in a savings account that you only touch for an absolute, you-would-die-without-it emergency. When an emergency arises, e.g. a job loss, use your emergency fund to carry you. When you spend from your emergency fund, replace what you've spent as quickly as possible. If you don't have an emergency fund, spend the next few months building one.
Avoid applying for new credit and loans.
Right now, banks are stingy with lending, so unless you have excellent credit, your application will likely be denied. If you're approved, you'll have a higher, more expensive interest rate. Neither of those are desirable outcomes. Not only that, putting in applications for credit will hurt your credit score, making it harder to get approved. Avoid making new credit applications during the credit crisis.
Keep your credit card balances low and check your limit before purchases.
Credit card issuers are becoming known for slashing credit limits. Your limit could be cut close to or even below your current balance, putting you at risk for over-the-limit fees, interest rate hikes, and even a credit score decrease.
Check your credit limit before using your credit card. This way you won't unknowingly exceed your credit limit.
A zero balance is the only way to protect yourself from the negative effects of a credit limit decrease. Be careful, if you don't use your credit card at all, your creditor might close the account completely to free up credit for other customers.
Watch out for sudden interest rate increases.
Banks make money through your interest payments. The higher your interest rate, the more money the bank makes from you. Your credit card agreement probably includes a "universal default" clause that lets your creditor increase your interest rate at "any time, for any reason." So, you could see your interest rate increase at anytime, good credit or bad.
In most cases, the creditor has to notify you, in writing, about increased rates and let you opt-out of the higher rate. Opting-out lets you pay off your balance at the old interest rate. The catch is your account will be closed and you won't be able to use it anymore. Just like with credit limit cuts, keeping a zero balance on your credit cards is the best way to avoid the high cost of interest rate increases.
Live within your means.
This is a tenet you should always live by, credit crisis or not. If you don't already have one, set a budget to help guide your spending. Cut back on unnecessary expenses so you're not tempted to pull money from savings or rely on debt to make ends meet.
Pay off your debt.
Now's a good time to pay off your credit card debt, but only after you have a good emergency fund to fall back on. Then, work on paying off your high interest credit card debt because it's costing you money each month.
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