A Credit Crunch to be Legitimately Worried About: Yours!

You can't turn on the tube nor open a paper without hearing about "the credit crunch". Pretty interesting given that credit spreads (basically the cost of borrowing) are the same as they were before these doom and gloom headlines started appearing en masse about a year ago. And especially laughable when you consider that the "tightening" means that banks are actually looking for proof of income and requiring a down payment for a house again! (This has been the historical, proven model -- it's not a credit crunch when lenders go crazy and give out too much money to easily, then decide to reign themselves in to a healthful level. Kind of like when you return from vaca and stop drinking ten pina coladas a day!)

I digress. Today's post covers personal credit. And more precisely: plastic. Some of us don't use credit cards, others abuse them to the point of wearing out their strips. If you're one of those in the former group, or a gal who pays her monthly balance, feel free to disregard the rest of the article. But if you're like a lot of people, perhaps a bit too tied to the "cha-ching" of Visa, MC, Amex, or all of the above, press on.


Time for a personal inventory: Each questions below has an italicized directive -- you'll need a pen and piece of paper. And a glass of Pinot -- something has to be sexy because this exercise ain't, although getting control of your credit will be!

1. How many credit cards do you own?
Experts recommend two to six cards. (I have one personal card and one work card -- yes, the latter counts even if your company pays it!) Applying for them continuously can lower your score, as can closing several lines of credit at once. If you have say, ten cards, aim to close an account every six months. Having more of them increasese the chance that you'll forget to pay one or be psychologically more inclined to buy by viewing them as separate entities versus a card.
---> write this number down

2. How much do you owe, combined, on your credit cards? What is the interest rate on each card? And are there any additional fees?
If you're paying off your balances monthly, super. If you're carrying a balance, you're likely paying pretty penny in fees.
--> write down the total owned and interest rates/other fees for each

3. Are you using cards to get by on bills month-to-month?
This is a bigger problem. If you are spending more than you make, you have a situation that will only get worse over time. Sure, we all go through down times -- the loss of a job, medical issue, an unexpected need for four tires, etc. But if you're living month-to-month on cards, or racking up more debt than you're paying off, you need a severe fix and a reasonable and tight budget. Period.
--> write down your monthly expenses and check those paid on credit card because your paycheck doesn't cover them

4. What are your typical purchasing patterns? Where do you tend to "blow it"?
This is an especially important come-to-Jesus if your answer in question three made you want to vomit. In order to fix the cycle of plastic pain, you need to figure out where and why you're overspending.
--> a more qualitative exercise: print out six months worth of statements and see if you can identify any patterns. Pay special attention to clothing/shopping, eating and drinking, sports, travel, etc. Tally your personal categories up.

5. Do you know your credit score and how your card use affects it?
There's no excuse not to know your credit score. You can get it for free on this website once per year. Using more than 30% of the credit available to you will lower your score. Having a lot of accounts or opening/closing a lot will lower it too. Other big no-no's are delinquent payments and overdrafts.

Take Action: By now you have a list -- organize it like this.
Card #1_____ - Balance____ - Rate____
Card #2_____ - Balance____ - Rate____
Card #3_____ - Balance____ - Rate____
(etc. if there are more)
Total Debt = ___________

(If this number is bigger than you expected, take a deep breath. At least you've just made a huge leap in taking control of your debt by recognizing it!)

In order to have psychology work on your side and save fees in the long run, you should consider paying off the card with the highest interest rate first. So if card A has a balance of $5000 and an interest rate of 8%, and card B has a $4000 balance with a 20% interest rate, by all means, attack card B first! You'll of course need to make a payment on the card(s) with the lower rates -- perhaps the minimum or slightly above, so as not to incur additional fees and penalties. Set these up for automatic payment via online banking so that there are no excuses!!!

Next, call your lenders armed with your credit score and ask for a lower rate. Does your boss give you a raise without your asking? Does your honey read your mind? Of course not! And I'm sure that you HMW are good at asking for what you want, so go for it. Assure the lender that you're "committed to being a great customer" and remind them how long you've been one. Better yet -- if possible, cite your history of on-time payments.

Finally, figure out how much you can pay each month and stick to the plan. Trust me, the joy of paying off each card or getting your balances to zero will much outweigh that of any purchase. And the more you pay, the better your situation will become. As your payments increase, your debt ratio decreases, and your credit score improves, you should be able to ask for even lower rates and perhaps refinance any outstanding loans (i.e., a car at a higher rate given past poorer credit).

You'll reach your goal -- zero credit card debt, faster if you commit to a budget. More on budgeting in my next post.