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Consumer Archive

Consumer

Buy now pay later too risky during tough times

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NEW YORK (11/3/08)--In the wake of a mortgage meltdown, massive layoffs and shrinking portfolios, credit-hooked consumers must rethink their buying habits. Even consumers with good credit are affected by recent industry changes (The New York Times Oct. 29). More borrowers than ever are defaulting on payments. Lender write-offs totaled a staggering $21 billion for the first half of 2008, forcing lenders to tighten standards for lending money, shut down inactive accounts and reduce credit limits for existing credit cardholders. A lower credit limit often translates to a lower credit score, forcing you to pay higher interest rates and making it harder to get new credit. If small business owners discover their credit limits have been reduced on personal and business credit cards, the resulting lower credit scores may make it difficult to manage payroll and budget. If you’re maxed out on credit cards, take steps to decrease debt:
* Stop the ‘buy now, pay later’ treadmill. Carry only one card for emergencies, and leave the rest at home. You’ll be forced into thinking about a purchase rather than splurging on the spot. Once you’re home, revisit your budget and ask whether the purchase is a want or a need. * Know what you owe. Tallying your debt may be the wake-up call you need to make a major change in spending habits. * Resist the urge to borrow from your 401(k). With stock prices falling to bargain-basement levels, now is not the time to bail on your retirement fund just to pay down credit card debt (Creditcards.com Oct. 27). It’s virtually impossible to make up the interest gains you’ll lose by borrowing, and you’ll pay taxes and hefty penalties on the unpaid balance if you default on the 401(k) loan. You may not qualify anyway if your plan stipulates that a loan must be for financial hardship. * Pay more than the minimum. And as you pay off one card, apply that payment to the next highest interest-rate card to get rid of debt faster. * Contact your creditors. If you can’t make a payment, call and negotiate a repayment plan. Most lenders work with customers who take initiative. But don’t negotiate a payment plan you cannot afford.
If you’re not maxed out and you have a good credit rating, be aware of how recent changes could affect you. Watch for:
* Higher interest rates on existing accounts. American Express will be increasing effective interest rates by two or three percentage points for some cardholders. * Leaner rewards programs. Some card companies are cutting corners to save money, switching to cheaper brands on some reward items. * Fewer solicitations in your mailbox. While this is good news for environmentalists, it reflects the tightening of standards and slowdown in granting new credit to those who need it. * Higher fees. As card company profits plummet, expect to see a jump in fees to make up for the losses. Don’t chance it--if you usually pay your bill seven days before the due date, up that to 10 days or more. Better yet, pay bills online and schedule electronic payments to eliminate late payment fees.