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Dear Debt Adviser,
We received notice that if
we did not use a credit card we have had for many years in the near future, it
would be canceled. Is this a problem, since we have other cards and really have
not used the card that's in jeopardy? Does this cancellation affect one's credit
rating?
-- Vicki
Dear Vicki,
Welcome to the credit crunch. What
you are experiencing is the first of possibly a series of contractions in your
credit that may end up with you in a vise if you don't take the right action now.
This
is probably happening to my other readers, too. Although you may not have fully
recognized it, these are the signs of what I have named the coming "Credit Winter." Lenders
want two things above all else in the current unstable credit environment: to
have less risk exposure and more income. You are among hundreds of thousands of
other credit cardholders who have or will receive similar letters in the mail
from their creditors. In this tight credit cycle, creditors
will attempt to reduce their risk to new bad loans by taking back as much unused
credit as they can. They do this by decreasing credit limits and closing or cancelling
accounts that are inactive. At the same time, interest rates
are rising. Teaser rates are flying south in the face of this oncoming "Credit
Winter," leaving your outstanding balances exposed to higher interest and without
the range of options you used to have to move them to a less costly card or line
of credit. But wait, there's more! There is an iceberg floating
onto the scene, and like all good icebergs, it is 90 percent hidden. I'm referring
to universal
default. Under this policy (used by many lenders), if you default on one obligation
from anyone, your rates can be raised by everyone. Universal
default may hit you in several ways. For example, imagine your $10,000 limit is
reduced to $5,000 on a card with a balance of $4,500. In addition, your interest
rate on the card is raised from the current 6 percent to 16 percent. (Because
banks have a reduced appetite for new credit, you can't move the balance to a
new card.) The higher interest rate may make it more difficult
for you to make the minimum monthly payment on the $4,500 balance. Come up short
on your payment for just one month and you get the Fee Fairy at your mailbox with
up to a $39 late charge for you. Worse, you can be looking
at 30 percent plus interest rates if you bounce a check or miss the payment date
on a credit card, mortgage or other account. Your interest rate may also increase
if you go over your new lower limit or suffer a decline in your credit score as
a result of sporting a card balance in excess of 50 percent of the card maximum. In
answer to your credit rating question, 30 percent of your FICO score is based
on amounts owed. One component of this category is the amount of credit available
versus the amount of credit used, with 50 percent utilization as the negative
tipping point. I strongly urge you to pull out your cardholder
agreements to get informed of possible pitfalls ahead. Then, I want you to take
a breath and get a bottle of wine. No, not to forget your troubles!
Instead, plan a new course for you and your family that relies less on credit
and has an aggressive debt reduction component. Sit down with your wife, partner
or the cat, open the wine and set some goals for the next few years. Describe
how you want your future to look. Write down the goals. Then put the wine away
and get out your calculator. You need a budget that will allow
you to attain goals by consciously directing money to where you want it and not
where the ad men do. In your budget, you must include a component for savings.
Yes, "savings," not credit. Savings will keep you from relying
on credit for emergencies that could be coming your way. Unemployment is rising,
investments are falling and an unexpected illness or expense could push you over
the financial edge. Armed with a budget, savings and a lessened reliance on credit,
you will be less vulnerable to economic shocks and other unpleasant surprises. I
have been reading a lot lately about how Wall Street will never be the same again.
But I have read very little about how Main Street needs to get ready to adjust
to a new credit reality. I hope this advice alerts my readers
to the need to prepare for a basic shift in how we manage our financial affairs. More
savings, less credit -- and yes, maybe even some more wine -- are part of the
new reality. After all, credit is just a tool to get what we want, and there are
other means at our disposal if we just know to look for them. | 
