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Survive the ‘Credit Card Crisis’

Consumers are feeling the pinch of a credit card crisis as card issuers raise rates and restrict credit, reports the New York Times.

It’s no news to me. Even readers with excellent credit are telling me Bank of America is raising APRs and American Express is slashing credit lines by 50% or more. Learn why the credit card crisis is upon us, what it is, and what you can do about it.

Why a Credit Card Crisis?

Simply put, credit card issuers are scared. They’re scared that their customers—facing increasing economic pressures themselves—won’t pay their credit card bills. The card issuers are scared of becoming just like the sub-prime mortgage lenders we now love to hate. And with good reason: credit card lenders are just as guilty of overextending pricey credit to marginally qualified consumers.

What’s Happening

In an effort to offset losses from increasing numbers of consumers who aren’t repaying their credit card debts and to limit potential future losses, card issuers are doing several things:

  • Raising interest rates, especially on customers with less-than-excellent credit
  • Approving fewer new credit card accounts
  • Closing inactive credit card accounts
  • Lowering the credit limits of some existing customers

How the Credit Card Crisis Affects You

In the coming months, don’t be surprised if your credit lines shrink even if you have good credit. Although card issuers once gave creditworthy customers huge credit lines, they are now “reclaiming” those credit lines to limit their potential risk should a formerly qualified customer hit tough times, rack up a balance, and never pay up.

If you’re carrying a balance on one or more cards, your APRs may also go up. And if you’re applying for a new credit card, feel lucky if you’re approved.

What You Can Do

As always, the best thing is to set a monthly budget you can afford and pay cash for everything. Have at least $1,000 cash saved for an emergency, and avoid putting daily or emergency expenses on your credit card. This is especially important if you’re already in credit card debt. Recent events prove that you cannot rely on low interest rates or that a credit line will be there when you need it.

If your existing credit card accounts change your terms on you, there’s not a lot you can do. If they raise your interest rate through no fault of your own (i.e., you didn’t pay late), you can call them, cancel your card, and repay your remaining balance. If they cut your credit line, again, you can either live with it or cancel the account. Unfortunately, in both scenarios, your credit score will go down.

If your credit score needs help, don’t even bother applying for a credit card anytime soon. If you have excellent credit and only have one or two credit cards, you may consider applying for a second or third card to hedge your accounts. That way, if an existing card slashes your credit line or jacks your interest rate, you’ll have another account to fall back on. Check out which credit cards still give you your best shot at competitive rates and rewards.

Have you been impacted by this so-called credit card crisis? What happened? What did you do?

Check your credit score for FREE (for real -- no CC required). Learn how here.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Those are some good tips. Hopefully the credit card crisis will make people think twice about purchasing on credit, and pay for items in cash.

  2. This Credit Fiasco has definitely affected me 100%. I’m now only using my debit card and cash. If the money isnt there, I don’t buy it.

    I’ve also totally paid off 5 department store credit cards (Talbots, Macy’s , Bon Ton, Sears, American Eagle)

    I used my tax return to pay half of my Firestone bill –and now will be chunking away at the remaining $1,100.

    The remaining three credit cards are also being “chunked” away at– one was closed and though the minimum payment is only $34.00 , I am paying at least $200 a month payment on that and the remaining two credit cards as well.

    My goal is to get them all paid off by 2011-2012, by the time our United States economy gets even worse .

    I anticipate another financial crisis looming over the horizon worse than the mortgage crisis–which will be the credit card industry crashing down hard. These are not good times to have any debt.

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