Using Credit Cards Wisely During Today's Tough Economy

Remar Sutton, DCU StreetWise National Spokesperson

Used wisely, credit cards enable consumers to manage cash flow and leverage their overall buying power. Today's tough economic times, however, have put pressures on financial institutions, businesses, and individual consumers. These pressures have given rise to ongoing changes in credit card account terms and rates being made by a number of card issuers. Such changes may in turn increase financial pressures on many card holders. Cash-strapped consumers squeezed by higher costs or employment woes may be tempted to bridge cash shortfalls by charging expenditures, even for necessities such as food and gasoline. The resulting cycle of increased debt can be down right dangerous to personal financial stability. This review provides some strategies for using credit cards wisely in today's tough economic circumstances.

In a March survey of credit card holders, one third of consumers reported recent changes in their credit card accounts. Even for consumers who had met all the terms of their accounts including always paying on time, changes included increased interest rates, reduced credit limits, higher minimum payments, and increased fees. Some card issuers are also closing accounts that have been inactive for a period of time. Many analysts attribute such actions to card issuers responding to higher defaults and risks and making pre-emptive moves in anticipation of the new regulations coming in 2010.

What can you do? First, pay attention to all credit card communications. Then, if you are a good customer with good credit you may be able to persuade your card issuers to rescind some of the changes. Call the customer service number on the specific card. If not, you may wish to move any balance on that card to a card with better terms.

If you have more than one credit card (the average for American consumers is four cards according to Experian), use the card with the lowest interest rate and the best overall terms. My recommendation: The DCU Visa Card offers very competitive adjustable rates and its terms in other aspects are much better than average.

Credit ratings as indicated by credit scores depend upon such factors as how much credit you have, what percentage of that credit do you use, and making all payments due on time. First, always pay on time. If possible, pay cards in full each month. If you need to carry a balance, then try to make more than the minimum payment. It's also a good idea not to carry a balance of more than one-third of the credit limit on a card. Because some card issuers are closing inactive accounts, you may wish to make a small purchase on each card monthly and pay it in full when the statement arrives.

In two recent news reports, I read about two consumers who had trouble making their credit card payments after they had charged large discretionary purchases. One bought a motorcycle intending to pay it off during the card's low introductory rate. The other bought a big screen television. When both were late or missed a payment, their cards' interest rates jumped to default rates and monthly minimum payments soared. If your employment is secure and you can safely contemplate a large discretionary purchase, then why not save for several months toward the cost rather than charge it. If you are contemplating buying a vehicle or other large consumer item, then securing a loan from your credit union is a much wiser plan.

At this time of year, it may be tempting to consider paying any income taxes you owe by credit card. Credit counselors and tax experts alike recommend against doing this if you are using the credit card not for convenience but because you don't have the money for the taxes. If you can not pay all the taxes owed when you file, you can ask the IRS for a payment plan. If you charge taxes on a credit card, you may not only pay a higher rate of interest, you may be setting yourself up for a debt that will linger through the year.

Using credit to purchase necessities because you don't have the cash in your pocket and will pay off the card when the statement arrives is called “managing cash flow.” Using credit to purchase necessities because you don't have the cash to pay for them at all is called “digging yourself deeper in debt.” If you find yourself stretching to make ends meet, it may be time to seek assistance with credit and debt management. DCU's Financial Wellness and Recovery program.

Using these savvy strategies, you can continue to make credit cards work for you even during tough economic times.

If you find this review helpful, please pass the word to your friends. Also email me with any comments or suggestions.

Prepared by Remar Sutton and Associates for DCU, April 2009. All rights reserved.

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