Crisis survival tips: Pay off debt, cut credit card spending

Wondering what to do in the wake of the credit crisis, bank failures, buyouts and Wall Street upheaval?

Experts say that in general, everyone should try to wean themselves off of relying on credit to pay for basic living expenses. Another key piece of advice: Watch your credit card terms for changes such as decreased credit limits, higher interest rates or additional fees.

“The watchword is for consumers to read their mail,” says Robert Hammer, CEO of R.K. Hammer, a Los Angeles-area bank card consulting firm. Cardholders must be notified in writing of any changes in terms of credit card agreements at least 15 days before the new terms take effect. “The smaller the print, the closer they need to look.”

Tightening credit card standards

If the credit crunch continues, borrowing money — whether for mortgages, student loans or credit cards — will become more difficult. It has already started in the credit card industry. Data collected by the Federal Reserve from senior loan officers at banks nationwide show credit card standards have sharply tightened.

Interest rate data collected by CreditCards.com’s Weekly Rate Report show cards issued by Bank of America and American Express increased their rates last week on several of their credit cards. Issuing banks typically offer cards with a range of interest rates; people with the best credit get the lowest rates. AmEx raised its lowest rate by 1 percent on three of its cards, while Bank of America lifted its highest rates by 4 percent.

Expect more cards to change. Events of the past two weeks have likely made banks even more skittish and likely to tighten lending standards further, financial analysts and card industry observers say. Banks can tighten lending standards in several ways. They may:

• Raise the interest rates on their new or existing cards.
• Raise the credit score required to qualify for new cards.
• Lower the credit limit on existing cards.
• Tighten terms and conditions on existing cards.
• Increase minimum payments on card balances.

What consumers should do

What should credit card users do? Experts say downsize your lifestyle as a hedge against what could be tough economic times ahead.

“The obvious answer is deleverage, get rid of as much debt as quickly as you can,” says Susan Menke, an economist and senior financial services analyst with Mintel Compreremedia, a Chicago-based consulting firm. “I would take a defensive position, whether you’re a consumer or a CEO. Try not to use credit cards as much.”

Among the questions card users are asking:

• Should you cancel a credit card issued by a bank, thrift or credit union that’s about to fail or be purchased by another bank?
• Is switching to a larger bank — with deeper pockets — a better choice than staying with a smaller lending institution that may not be able to stay afloat during the credit crunch?
• Will you get the same credit card terms and conditions with the new bank owner that you did with the old issuer?

“There is no guarantee that if one leaves a smaller organization for a large one that the larger one will not be falling, too,” according to Hammer. “No one is immune from the law of gravity or economics.”

Here’s what credit cardholders need to know if they are:

Transactors: People who pay off their credit card balances in full each month, called “transactors” in the industry, have little to worry about regarding interest rate increases. However, they should watch their mailboxes and monthly statements for changes in terms, such as lowered credit limits. Revolvers: People who maintain revolving balances on their credit card accounts should try to pay off as much debt as they can. Paying off debt limits exposure to higher interest rates or lowered credit lines. Rewards junkies: People collecting points on their rewards cards  should be alert, because credit card terms can be changed at any time for any reason. Debit card users: Deposits in checking and savings accounts tied to debit cards are insured for up to $100,000 by the FDIC. Watch for increases in fees and keep usage within limits to avoid excessive fees. Bad credit risks: People with poor payment histories are most at risk for high interest rates, APR hikes and over-the-limit fees. Avoid missing or late payments. If lenders notify you of interest rate hikes, opt out of the higher rates, pay off the balance at the lower rate and stop using the card. (Update: On Aug. 20, 2009, provisions of the Credit Card Act of 2009 went into effect that mandated consumers be given the right to opt out of increases in interest rates, fees, finance charges and certain other changes in credit card agreements. See story.) Good credit risks: It’s more important than ever to maintain a good credit score. Pay your bills on time and, if possible, avoid incurring any new debt. Try to pay more than the minimum each month to pay off your debts sooner and reduce your credit utilization rate.

In the past week alone, two major banking moves — the purchase by Chase of Washington Mutual and Citi’s rescue of Wachovia Bank only to be followed four days later by a Wells Fargo buyout of Wachovia — have reshaped the credit card landscape. Bank of America — the No. 1 U.S. credit card issuer just a few weeks ago — was dethroned by second-place Chase.

“Yes. We’re No. 1 when measured in terms of outstanding” credit card balances, Chase spokesman Paul Hartwick wrote in an e-mailed response. “Prior to the WaMu transaction, Chase issued about 158 million cards and had about $155 billion in outstandings. WaMu had 13 million cards and $26 billion in outstandings. So the new total is 171 million cards and $181 billion outstandings,” according to Hartwick.

In a $50 billion deal announced Sept. 15, BofA bought Merrill Lynch, including Merrill’s credit cards issued to users with high net worths. BofA spokeswoman Betty Riess declined to comment on the issuer rankings. BofA with $158 billion in outstanding credit card balances on Visa and MasterCard accounts in the fourth quarter of 2007.

Stay on high alert

Banking industry observers say they expect more banks to fail and further industry consolidation in coming months. TowerGroup, the industry research consultants, predicts that “the weeks and months to come will bring more mergers and restructuring for the U.S. banking industry.” In a news release, the consultant asserts: “The consolidation cycle will create another two to three national banks alongside Bank of America and the new Chase … TowerGroup believes the banking industry is on the verge of a new hierarchy.”

What will banking industry consolidation mean for everyday consumers? It means fewer choices of credit card issuers. If you don’t like one issuer’s terms or reward points, it may not be as easy to switch to another offering better options, experts say.

“Less competition is not good,” says Menke, the financial services analyst.

To comment on this article, write to: Editors@CreditCards.com.

See related:  What happens to credit debt when a bank fails, Citi buys Wachovia’s banking, credit card businesses, Chase buys WaMu’s banking, credit card assets, Will cash become king again?, Wachovia card user wonders what next, Lessons from ‘It’s a Wonderful Life’