It’s a classic Catch-22. As the economy takes a downturn, it becomes harder to make ends meet. In times like these, the easy credit that credit cards afford can be a lifesaver to carry you over until the economy—and your income—picks up.
At the same time, however, with the tightening credit conditions, credit may be much harder to come by. Not only may the card issuers be more selective of who they approve, if you don’t maintain a good credit score, you may even find the credit limit on your current credit cards lowered.
To isolate high-risk users, many credit card issuers make a periodic review of customers’ accounts and credit reports, looking for signs of financial distress. So now, more than ever, it’s important to keep your current credit cards in good standing and your credit score high. This will ensure that you keep your current credit card limits and leave you eligible for getting approved for additional credit cards — should the need arise down the road.
To keep in good standing, follow these five tips:
- Always pay all of your bills on time. This may sound like a no-brainer, but most people assume they are fine as long as they pay their credit card bill on time. Not so. A late payment on another credit card, another loan or even your telephone bill can be enough to put you in an at-risk category and possibly trigger adverse actions. Card issuers view several late payments as an indication that your finances are hurting and that you might one day default on your payments altogether.
- Don’t always pay just the minimum payment. If you pay the minimum every month on high-interest credit cards, it’s usually taken as a sign of financial distress. Whenever you can, pay at least 150% of the minimum payment due, preferably more.
- Avoid credit inquiries. Recent credit inquiries show up on your credit report and it is another red flag that you may be cash-strapped and possibly in financial trouble. So only allow your credit report to be pulled when it’s absolutely necessary.
- Avoid maxing out your credit card for an extended period. People who are close to their credit limit always fall into a high-risk category. Having a high percentage of debt relative to your available credit also hurts your credit score, because a full third of your credit score is based on how close you are to your credit limits on your credit cards. As a basic rule of thumb, try not to use more than 30 percent of your available credit on your credit cards.
- Avoid asking for a credit limit increase. It used to be that card issuers would throw credit line increases at you simply for the asking. Not anymore. If you ask for a credit line increase, you are less likely to get one, and card issuers may interpret it as a sign that you are struggling to make ends meet.
If you need to ease your financial burden, look for ways to cut your expenses or negotiate a easier payment schedule temporarily on existing debt. A professional adviser with no products to sell can also be a great resource. Try, for example, Consumer Credit Counseling Service (www.cccservices.com, 800-355-2227), which offers free assistance.
