Managing Debt Remains Key in Face of An Uncertain Economy
Andrew Leckey

 

Easing out of recession amid the economic and market ambiguity of 2010 is the uneasy position that average consumers find themselves in these days.

Piling up home-related debt and betting on immense financial-market gains--the popular game plan of a few years ago--is no longer in step with the times.

Tackle financial aspects of your life that you can actually do something about--such as managing your debt load and monitoring your credit rating. Get these in order and other financial considerations fall into place. A cautious economic era requires monitoring of your entire situation.

"Pockets of the population have seen their credit scores get worse, though most consumers use credit smartly and primarily as a convenience tool," said Catherine Williams, vice president for financial literacy for the non-profit consulting firm Money Management International Inc., Houston. "In some cases, folks borrowed to do remodeling or added on to their homes using credit cards and home equity loans, but their projects cost more than expected and didn't provide the large return the borrowers expected."

This is a wise time for every consumer to examine each account tied to their debt obligations and decide if they really need it, advised Williams. For example, if you no longer shop at a certain store yet have a credit card there, it may be time to finally close that account, she said. While other advisors recommend keeping the card and using it every six months to show greater unused credit on your credit report, whatever you choose for your situation should be thought through in advance.

A rule of thumb created three decades ago is that the debt you owe each month for credit cards and car payments shouldn't exceed 20 percent of your net income, Williams noted. People who have kept their debt down to that level are usually able to weather the financial storms much better than those who don't.

"While most consumers pay their bills on time and the median credit score is still above the 700 mark, financial difficulties have caused credit scores in aggregate to slip during the recession," said Greg McBride, financial analyst with Bankrate.com, North Palm Beach, Fla. "Some people have had their credit limits cut, which may have a negative impact on their scores, while others undergoing serious financial stress have seen their credit scores really drop."

With unemployment around 10 percent, it will take a while to make a dent in improving credit scores that have gone down, said McBride. Even when someone gets back to work, it may take months to catch up on past-due obligations, so it will be a slow climb back.

Credit scores consider your payment history, amounts owed, length of credit history, types of credit you use and any new credit. Paying bills on time and keeping credit card debt at reasonable levels are major considerations in all of that.

A credit score of 750 or better is tops and likely to get you the best rates on loans; 710-750 is also quite solid; and 650-710 means you'll be approved but won't be a star. Slide down to 580-650 and you'll receive less attractive terms. Anything below that means you may be denied credit or will receive poor rates if you are even allowed to borrow.

New considerations began to surface after the economic meltdown of 2008.

"A credit score can actually be impacted by the financial institution itself, if a credit limit was cut primarily because the bank was experiencing financial problems it had to deal with," warned Joe Ridout, a spokesman for the non-profit Consumer Action group (www.consumer-action.org) in San Francisco.

In the short run, it is painful for consumers to have less access to credit than in the past, but over time it is reasonable for banks to exercise more control over those to whom they offer credit, believes Ridout. Prudence in borrowing makes sense at both the personal and institutional levels. You'll notice we receive few credit card offers through the mail these days.

"I spoke with one person who had a $19,000 credit limit that was reduced to $300, which is an indication that a bank can offer you credit or not," he said.

You can obtain a free copy of your credit report at every 12 months at www.annualcreditreport.com, which shows what you owe and how you pay, through information from the major credit bureaus TransUnion, Equifax and Experian. To obtain your credit score, you'll need to pay between $8 to $15 and can do so through an online link of any of the three credit bureaus.

Contact creditors if you have a problem paying and never duck them; make sure your credit limits have been updated by bureaus; and dispute old negatives on your report if they aren't valid. See a non-profit credit counselor if necessary and avoid crooks promising immediate credit salvation. Don't sign up for a bunch of new accounts if you already have plenty or have encountered trouble.

"If negative items on your credit report are legitimate, all you can do is continue to pay bills on time and your credit score will rise," concluded Ridout. "Also, if possible, use only 10 to 20 percent of your available credit."

 

 

Managing Debt Remains Key in Face of An Uncertain Economy

 

(c) 2010 Andrew Leckey