Recession-proof your credit and finances

How to manage your finances and credit cards in a recession

By Katie Ford and Carter Pagel

Temporary slump. Economic downturn. Whatever the pundits are calling it, 61 percent of Americans believe the economy is suffering through another recession, according to a recent Associated Press/Ipsos poll.

When it comes to managing personal finances, you should do two things consistently, no matter the state of the economy: save money and pay off debt. However, the real key to surviving a recession is to spend less money. When gas prices go up, then something else must come down.

But where do you begin?

Take inventory
To control what you spend, you have to know what you spend. Michele A. Sweeten, a certified public accountant in Austin, Texas, recommends organizing your expenditures into 10 or fewer categories and tracking your spending for one month. Categories can include:

• Auto expenses
• Mortgage and utilities
• Meals and entertainment
• Insurance and medical
• Household and miscellaneous
• Debt service (credit cards, school loans and car loans, but not the mortgage)
• Clothing and other vanities
• Hobbies
• Charity

"I have found that when people take a bird's-eye view of their finances, they begin to see trends in their spending that they would like to change," Sweeten says. "Also, by setting aside a monthly budget for debt service, you begin to see the power of the dollar over time."

For example, if your debt service budget is $300 a month and you have three credit cards to pay off, pay two at the minimum required payment, and put all the rest of the budget toward the balance on either:

• The smallest balance credit card (so you can pay it off quickly).
• Or the highest interest rate card (so that you can save the most money).

"Soon, one card will be paid off, and all the extra in the budget can be directed at the next card," Sweeten says. "In this way, the pay-down gains more momentum as time goes by. If you're controlling your spending while doing this, you will eventually be debt-free."

Transfer balances
A tricky proposition but one that could save you money in the long run is to transfer your credit card balance to a new card with a zero percent interest rate. By transferring to no-interest accounts, you can use the money that would have gone to interest to pay off the principal. Let's say you normally pay $50 a month in interest. If you put that money toward a balance of $500 on a card with zero percent interest, you could be out of debt in 10 months.

However, if you use this strategy, it's crucial that you:

• Always read the fine print. Some companies advertise 0 percent interest, but charge a fee for the transfer.
• Some companies retroactively charge interest on transfers or purchases, so use the no-interest period only to pay down your debt as much as possible.
• Don't think you can transfer forever to avoid interest. Each time you open a new account, you'll have a credit inquiry. Too many inquiries will hurt your credit rating.

Think twice before closing accounts
You might be tempted to close lines of credit to avoid using them, but this can actually work against you. As long as you're making timely payments, operating lines of credit can strengthen your credit score because you're proving that you're financially responsible.

Also, if you're thinking that consolidating your credit cards could help your financial standing, think again. A balance that sits right under your credit limit on one card can be more harmful to your credit score than having that same amount of debt spread out over a few cards, according to Thomas Fox, a community outreach coordinator and curriculum developer at Cambridge Credit Counseling Corp.

Know yourself
Another key to financial success is to truly study your attitude about money. Know your strengths in controlling your spending  --  for instance, you never spend more than $20 on sunglasses  --  as well as your weaknesses -- you must have that $5 cappuccino to start your day.

"Chip away at your weaknesses little by little; going cold turkey usually fails," Sweeten says.

Penny-pinching can be less painful if you:

• Look for less-expensive substitutes for the things that you really enjoy
• Rate all of your 'luxuries' by how much pleasure they give you, and keep only those at the very top of the list
• Reward yourself with one of the true goodies only when you have controlled your spending for a week

In good times and in bad times, you need to chip away at your debt and put money aside for emergencies. During a recession, however, you need to simply spend less. Whether you call it a recession or just a slump, the reality is: You don't want to be caught unprepared.

Published: March 13, 2008

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