It seems that in America, living on credit is the way of life. Making purchases with our plastic when we are all out of paper is all too tempting. Credit cards make living easier, but that can change in a heart beat if the cards get misused. Using the card without thought can pile on the debt way beyond what you may be able to handle. It is all too easy to get a credit card thanks to the numerous pre-approved offers that we are sent. Rewards programs mask the fee and interest rates that are hidden the fine print. These can be changed at the whim of the creditor, but it is seductive when they are willing to give you card after card.

One can protect themselves by preparing before getting a credit card. You can avoid digging yourself an inescapable financial hole by considering the unwritten rules. Talk to family and friends about how to rightly use a credit card, as they can be good examples to learn from. This is true more so if their credit is spotless. If their credit is poor, then they are still worth learning from in terms of what not to do and how to avoid the problems that they got themselves into.

Make a budget and have a place in it for the credit card. This can be a simple as a ledger sheet or spreadsheet where you list where your money is coming from and where it is going. Using this sheet as a guideline, you can figure out how much you can spend on the card, taking into account anywhere from 10 to 30% interest. Pay off the card completely every month, debt that sits there costs you money. Prioritize your bills, putting food, electricity, heat and rent well before your credit card. If you have little remaining money, try to avoid using your new card except for the dire emergency.

If you already have debt, then attack it immediately. Call creditors, explain your situation and see what they can do to help you in this situation. Some may give you time, while others will lower the minimum for payment. If you are being seen as making the effort to fix the situation, then you can establish a good relationship with your creditor. Keep them up to date on contact information and do not make it a chore for them to contact you. Be proactive in fixing your debt and contacting your debtors and informing them that you care about the situation. That way they will not feel the need to hassle you.

There are a number of routes one can go with a credit card, and it is a mistake to treat it as free money. Learn from your friends and relatives, despite their score being good or bad. Stay within what you can afford, and if you fall behind, stay in touch with your financial institutions, and you will find credit cards much easier to have and keep.

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Last week, Capital One cancelled one of my older credit cards for non-usage. With credit card companies and banks scrambling for capital and looking to reduce risk, this was bound to happen. For background, I’ve had this card for almost 6 year and have only used it once for a promotional balance transfer. It had a $5,000 credit line and I haven’t used it at all since I opened the account.

From Capital One’s point of view, I can understand why they are doing this. It costs a few dollars to issue new plastic (every 2-5 years), and figure $.50 for every mail notice. My account probably costs Capital One $3-4 per year to maintain while I generate absolutely no revenue for them. In addition, with the current economic environment, I represent a liability. In many cases, people who start using their card after a long period of inactivity are often more risky; so, this is an appropriate action, in my humble opinion.

Now, with all modesty, this account closure has little impact on me. I have good credit and access to several other credit cards. But for others, this could be a very different situation since lowering of available credit could have a negative effect on one’s credit score. Here are some tips to protect against reduced limits and credit card closures:

• Have Multiple Credit Cards. Like any good stock portfolio, you should diversify your access to credit. Don’t let one bank control all your credit. People with good credit have 3-6 credit cards, on average.
• Use Your Credit Cards to Show Activity. My account was closed because I didn’t use it for more than 5 years. You should try to use each of your credit card a few times a year to show activity. I recommend gas or groceries since those are necessities that don’t encourage splurge spending.
• Be Consistent With Credit Usage. Erratic spend behavior can be another indication of risk. So, don’t charge large amounts or use cash advances unless this is your normal usage. Otherwise, your actions may trigger a reduced line or account closure.

If you read our blog frequently, you will think these tips are repetitive or are the same advice for other scenarios. The reality is that good credit habits are relevant in almost all situations so please forgive the repetition.

For many US consumers, it is a common misconception that if you have no debt then you must have good credit. Several of our members write comments with that assumption every week or ask if the system is broken because their credit score is not excellent even though they carry no balances.

The simple answer is that debt is only one component of the credit scoring system. (There are over 200 variables that go into your credit score.) You have to remember that a credit score is supposed to tell lenders how likely you are to default on a loan. If you have no debt, you are probably less likely to default, but from a statistical perspective, you are even less likely to default on a loan if you have no debt and you have had access to large amounts of credit for a long time.

That is the simplest of reasons why credit scores are not necessarily tied to debt. With that said, carrying too much debt is definitely a bad thing as it could affect your ability to pay them all back. If you have no debt and want to improve your credit score here are a few tips:

1. Have Credit Cards. Consumers with good credit have 3-6 credit cards on average. If you need additional cards, make sure you apply for no annual fee credit cards. Having and managing your access to credit responsibly is an easy way to show lenders that you do not abuse credit and that you can pay bills on time.
2. Use Your Credit. It generally does not make sense to pay interest or fees just to boost your credit score, but using your credit cards regularly and paying in full helps develop a histoy of on-time payment. Buy a tank of gas once a month or use your credit to pay for groceries, pay your bill in full and build your credit profile with positive activities.
3. Use Different Types of Credit. Credit is a great thing if used responsibly. Auto loans, mortgages, and home equity loans are another way to help build your breath of credit experiences. Now don’t get one just to increase your score but realize that it is not bad to have these types of tradelines on your credit report.
4. Have a Long Credit History. Keep your oldest credit card account open assuming there are no fees. A long history of credit is a great way to show lenders that you are responsible with your credit.

Share your thoughts about this topic.

Early this year, financial prognosticators were saying that the credit card industry was not going to go the way of the mortgage industry (i.e. totally implode) because credit cards had a better financial base.  After all, if a credit cardholder decides to “foreclose” on a credit card, it’s not nearly as damaging to a credit card company as foreclosure on a house.  A mortgage can run hundreds of thousands of thousands of dollars. Anyone with hundreds of thousands in credit card debt is in serious financial trouble.  $30,000 is a lot for a credit card, while that’s dirt cheap for a house.

Add to that the fact that credit card companies are making a relative killing on interest rates and you’d think that credit card companies would be able to weather the financial crisis.  If only that were so.  There’s continuing talk that the credit card industry will be the next big thing to fall apart.  Not only are credit lenders tied to losses in the mortgage industry, but credit cards are having problems all their own.  Recent news from American Express is likely the first in a long line of potential problems.

Amex’s Problems

American Express recently requested $3.5 billion from the Feds as part of the bailout package.  Amex has stated that they’re suffering from lost revenue due to the credit crisis.  In the past, Amex has remained liquid by packaging credit card debt and selling them to investors in the securitization market.  If this sounds eerily familiar, this is what led to the subprime mortgage meltdown, as bad credit mortgages were also packaged and sold to investors and then lost value.  The market for credit-card back securities is fading.

It is surprising, in some respects, that Amex is having trouble.  While spending is down overall, it would stand to reason that credit spending is up due to people not being able to afford necessities with cash.  Buying groceries on credit may not be so financially wise, but for some people it’s the only option.  Alas, it turns out that people are cutting down on spending both with cash and on credit.  Couple that with increased defaults and it is not surprise if credit card companies are feeling the hurt.  For American Express, third quarter profits fell 24 percent, or 70 cents a share.

What Does This Mean for Credit Card Holders?

OK, that’s all well and good.  Amex fell 24%.  What does that mean for your current credit cards, or if you are looking to apply for a card in the future?  Is everyone going to get a 30% APR?  Does good credit matter anymore?  Here are some answers.

If you have an Amex card, you may already be feeling the heat.  Amex recently lowered credit limits for 10 percent of their cardholders.  Don’t rely on notifications because it is possible your credit limit may go down without your knowledge.  What will happen is that you’ll go over the limit and have to pay the resulting fee.  As most credit card terms state that the issuer can change rates or fees “at their discretion,” your APR and fees could very well go suddenly up.  Fact is, if you have an existing balance, there’s not much you can do about this, as it’s written in the card’s terms and conditions.

Your credit cards will still work, however.  One of the fears pre-bailout was that any inaction would totally freeze credit markets so your credit cards would be worthless.  That didn’t happen and it likely won’t happen in the future.  But whenever a lender is taking a hit, be certain that they’re going to raise rates and fees to make up the difference.  This is even the case if you’ve hunted around for the best credit card deal, you have

Ben of Money Smart Life, offers regular money tips and advice for a better life. Sign up to receive daily money smart tips.

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Christmas is only a few days away now. What are your plans for the holidays this year? Are you staying home or visiting? No matter what you’ll be doing Credit Karma wishes you and yours a terrific few days spent together with family and friends. We’ll see you here next week.

National Credit and Economic News:

• Free From Broke offers 8 Ways The Economic Crisis Can Be Good For You.
• Get Rich Slowly looks into Three Legislative Proposals That Could Have Major Consequences for Your Finances.
• Palm Beach Posts says Credit lines shrink even at prime level
• Forbes wonders After The Bailout, Tariffs?
• Business Week writes Air Fares Are Plunging, Along with Traffic.

Credit Scores:

• Star Telegram asks Why check your credit report?
• Wall Street Journal says Credit Unions Offer Auto Deals.
• New Credit Scoring System Ready for ‘09 writes Kiplinger.

Credit Cards:

• A My Two Dollars’ reader faces this dilemma: Pay Off Credit Card Balance Or Keep Emergency Fund?
• Stop Buying Crap writes Credit Cards Made a Little Less Evil with New Industry Rules.
• Digerati Life asks Applying For A Credit Card? Review The Credit Card Bill of Rights!
• Read the highlights of new credit card rules over at The Sun’s Financial Diary.
• American Banker says Card Rules Done, Now for the Makeover.
• Blueprint for Financial Prosperity on the subject of the Best Charity Credit Cards.
• The Economist talks about a nudge in the wrong direction when it comes to credit cards.

Debt:

• Mr. ToughMoneyLove posts The College Student Debt Machine: A National Disgrace.
• Cash Money Life says less debt, and more income!
• FT publishes holiday home equity used to pay off UK debts.
• New York Times presents Governor to Unveil a Low-Cost Student Loan Program.

News and Carnivals Featuring Credit Karma:

• Rickety for Credit Karma Checkup.
• Dec 15 Edition of The Holiday Spirit at Systems Overload.
• Carnival of Credit Report Stories at Lava.

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For most people, the thing that launches them into credit trouble in the first place is an unexpected financial emergency. Individuals who pay their bills on time, people who use credit cards wisely and people who always keep up with their mortgages can suddenly be thrown into a complete financial crisis when a surprise strikes them. Here are ten ways that you can prepare for and handle financial emergencies.

1 - Plan ahead in order to make a difference.

Start a savings and make provisions for whatever may occur. You should put a portion of every pay check into a savings account.

2 - Expect the unexpected so that you may plan and prepare accordingly.

You should be prepared for every scenario. Plan for the worst, so that you can handle anything that may come your way.

3 - Pay yourself first rather than waiting until the end of the month to put money into your savings.

Putting the money into savings now will ensure you do not spend it easily through out the month. Otherwise, you may not be able to save when the time comes.

4 - Increase your income if you are having trouble paying your expenses.

This may entail finding a better job, or supplanting your income through another job. You may also be entitled to a raise at your current job.

5 - Sell off some assets to accrue extra income if you are having trouble paying your expenses.

This can be as small as a garage sale or as large as selling one of two cars. Having stuff is pointless if you are unable to pay for rent or utilities.

6 - Borrow against your home if you absolutely have to, so that you can pay off emergency expenses without allowing them to overwhelm you and put you further into debt.

The equity in your home should be used as a last resort, as you are putting your home at risk. It is your largest asset, however, so it can be helpful for a tight spot.

7 - Call on friends and relatives to see if you can get some financial assistance in your time of need.

Those close to you can provide the assistance you need. Everyone is connected and those close to you would help you; you would help them if the situation were reversed.

8 - Defer your retirement contributions, funneling the money toward a more important cause such as an emergency expense instead.

If you are unable to proceed in the now, planning for the future is worthless.

9 - Seek professional help if you cannot find any other way to deal with the emergency expense without putting yourself into debt.

There are experts out there who are specially trained just for this purpose. Do not ignore this important resource.

10 - Declare bankruptcy if there is no other option available for you to overcome the obstacles created by a financial emergency.

Bankruptcy is a government provided way to get out of debt and start anew, although it carries with it a stigma which will be hard to shake off of your credit report.

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When it comes to credit cards, how you use them can be good or bad for your credit health. What it takes to get the most benefit out of your card is not quite what one would think. All it takes is to know how the system works and learn what it will take to get the best out of your cards.

1 - Make use of price protection.

This kind of program will enable you to prevent suffering at the hand of weekly price cuts. You could have put down $500 on the latest phone, only to find that the next week it has been cut to $200 dollars. Many credit cards offer a price protection plan, giving you a refund if a better price is found within one to three months.

2 - Read through the terms and conditions.

These are simple to read, but their biggest benefit is that they provide all of the hidden fees, rates and other pertinent information.

3 - Balance transfers usually are not worth it.

It is typically the case that the fee for the transfer, along with the interest on the fee, will end up costing more than the higher interest rate on the original card. This is especially true of your immediate goal is to pay off the balance.

4 - Always choose the longer intro period.

Although this may seem a bit counter intuitive, but an interest free period over half a year to one and a half years will be much more of a deal than what can be gotten through other offers.

5 - Choose cards with offers that are awarded when the card is not used.

Many cards will give you rewards just for signing up or making a single purchase. Benefits include airline miles, free car maintenance.

6 - Do not carry your balance over month to month.

If you want to make a long term purchase, bank line of credits are the best bet. Carrying over a balance over each month can cost you a lot in interest fees.

7 - Choose cards with rewards that you will use.

Those who like to travel, should choose a card with airline miles. Those who are not into travel can choose a card with gas rewards, or savings funds, etc.

8 - Above all else, choose cash.

Just about every reward program is a 1% cash back program, in one form of reward or another. The best choice is to just accept the cash reward and use it the way you want, instead of having to deal with all of the rules surrounding using rewards.

9 - Only go with the purchase protection.

Extended warranties are not only replaced by purchase protection, but the latter will also cover the item itself.

10 - Use more than one credit card.

If you need to carry a balance over a month, then it is best to have a card with the lowest rate you can find. Different cards will earn different rewards, so having more than one can earn you a variety of rewards, so long as you minimize the amount you carry over month to month.

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Good morning readers! Below are several articles pulled for your reading pleasure. We hope you find them useful and interesting. They’re sorted by category or topic of interest to make finding and selecting reads easier. Have a great rest of the weekend and we’ll see you here again next week.

National Credit and Economic News:

• The Columbus Dispatch writes $2 trillion in credit may be cut.
• Chicago Tribune announces banks cutting credit; how to keep yours.
• The Wall Street Journal on How You Can Rebuild Your Wealth.
• Subprime Blogger talks about Recession vs. Depression.
• Financial Blogger posts A Banker’s Perspective On The Banking Industry.

Credit Scores:

• My Desert says credit scores get analyzed more than ever.
• The Consumerist on Hard And Soft Credit Inquiries, And How One Hurts Your Credit Score.
• Forbes offers these ways to Improve Your Credit Score.
• American Consumer News asks Bad Credit? Getting a Loan Can Be Difficult.

Credit Cards:

• CNN on the Money with this Web Extra: How to Manage Credit When You’ve Lost Your Job.
• Frugal Dad on The Pros and Cons of Credit Cards.
• Generation X Finance posts Be on the Lookout for Fraudulent Credit and Debt Card Charges From ADELE SERVICES 800-764-8104 or GFDL
• Money Ning gives 15 Tips About ATM and Check Card Safety.

Debt:

• Los Angeles Times advices pay down the credit card, then the home equity loan.
• The Sun’s Financial Diary offers these ideas on How to Use Your Credit Card without Going in Debt.
• The Wisdom Journal wonders if Anyone Feels Sorry For Debt Collectors?
• Credit Card Forum posts Credit Card Debt: [Honestly] How Bad Is It?
• Money Hawk writes Let’s NOT Loan Money to Family and Friends…
• The Happy Rock asks Student Debt…How Much is Too Much?

News and Carnivals Featuring Credit Karma:

• CK’s press release with International Business Times.
• CK’s press release with Earth Times.
• 42nd money hacks carnival: laid-off and freelancing edition at Financial Wellness Project.
• Computer Finance says Credit Karma Uses Advertising Model to Take on Subscription Model in Credit Score Monitoring.
• Brief shoutout from Debt Chronicles in Credit Score Increased!

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If you want to avoid paying higher interest rates, and you want to increase your chances of getting a loan, it is important to have the best credit score possible. For many Americans, debt and the problems in the housing market have taken quite a chunk out of their credit score, but luckily, there are many ways that you can easily manage your credit score and start to see some real benefits from your efforts.

The first step to take before you get started is to set up a credit score monitoring service. This will help you see what you are working with and give you incentive to keep on going. The best monitoring services will give you a daily look at your credit score and you can see the changes on a daily basis. This will help you gauge the efficacy of your efforts and help you craft a better strategy for managing your credit score.

Once you have a monitoring service in place, you can begin to work on your credit score. You’ll want to target any existing collections, if you have them, since these can really drag your credit score down. Go over your credit report and see if you have any on file. The report should include contact information for the collections agency and you’ll be able to see how much you owe.

Instead of immediately sending off a check to the agency, you’ll need to first put together what is called a Pay for Delete letter or PFD. This basically informs the agency that you are willing to pay off the debt, but only if they agree in writing to remove the record from your report in exchange. Do not send payment until you get the signed agreement back in the mail. This can be forwarded to the credit reporting agencies if the collections agency fails to remove the record after you’ve paid.

The next step in raising your credit score is to lower your overall balances. If you have a high ratio of debt to available credit, this is going to affect your score adversely. You don’t necessarily need to pay off all of your balances, but you should get them as low as possible. If you have a good payment record with a creditor, you can also request a credit limit increase, since this will make your ratio more favorable.

During the time when you are trying to manage your credit score, it is best not to apply for any new credit. This creates what is called a “hard pull” on your credit report and this can result in a reduction in your overall score. It is best to wait until you have your credit score where you want it, and even then, you’ll want to limit your requests for new credit to around two or three a year.

Following these simple strategies can help you see a large change for the better in your credit score. Staying current on all of your bills is the next step to maintaining that score.

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The worst negative record that you can possibly have on your credit report is a bankruptcy. The impact that a bankruptcy has can last for many years, as this negative mark on your credit report can last for as long as a decade. You may not be able to get approved for credit or a loan at all during the first few years after you have filed for bankruptcy, because it has a very large and very negative impact on your perceived capability to repay an obligation.

Despite the negative impact that bankruptcy has on your credit, it is still an option to consider if you find yourself in very serious debt that you cannot seem to get yourself out of. If you are living from one paycheck to the next and have no way of paying off old debts, then bankruptcy is an option that it may be worthwhile to look at. Your credit rating is definitely going to be in ruin while you recover from your bankruptcy, but it will also allow for you to finally dig yourself out of what is a certainly overwhelming hole, reestablishing good credit over time. At the same time, filing for bankruptcy can stop collection agencies from calling and harassing you, and can stop other debt related problems from plaguing your life as well.

However, you need to realize that bankruptcy is not an easy way out of your debt, or a quick fix either. The procedure associated with filing for bankruptcy can be truly emotionally draining for many years. Following a bankruptcy, you will be ineligible for loans, credit cards and many other types of credit. There will also be additional restrictions that you need to adhere to. You could also face rejection when it comes to finding a job, because employers are legally allowed to check your credit when they decide whether or not to hire you.

Before you decide to file for bankruptcy, it is vital that you sit down and discuss your situation with credit counselors working with reputable counseling organizations. They have the experience needed to advise you on steps that you can take to fix your situation, as there may be alternatives to bankruptcy that you can try before you completely destroy your credit report in favor of a fresh start. If bankruptcy truly is the only option, then they will tell you this, and will advise you on how to go through the process.

Bankruptcy can be a depressing process but it can give you the chance to begin again with a fresh credit report and without the debt burden that you had before. You should begin your credit repair campaign now, and continue even after filing bankruptcy. As you cultivate healthy money management habits like saving and budgeting, you will find it easier to keep yourself from going into debt again.

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