Tips for Consumers During a Credit Card Crackdown

Use It or Lose It

One of the quickest ways banks can shed risk on their books is to eliminate all the dead wood customers '- the ones that haven't charged anything in years. If you want to keep the line of credit open, use the card periodically.

"What were seeing happening in some cases is that people have a credit card that has a $10,000 credit line and hasn't been used for several years. They kept it just for emergencies," says Carol Kaplan, spokeswoman for the American Bankers Association. "Those people just may get a letter in the mail saying their account is closed for inactivity," she says. "Banks want to limit their risk."

Keep in mind that closing cards could hurt your credit score. That's because credit reporting agencies put a lot of emphasis on what is called your "utilization ratio." It is essentially your total debt as a percentage of all your available credit. If you lower your available credit by closing cards, your utilization rate can actually look higher, hurting your credit score

Next: Tip No. 2

Watch for Lower Credit Limits

Another way Kaplan says banks are limiting risk is by lowering customers' credit limits. If you've kept a high balance but left a little cushion under your limit, that cushion may have vanished. You don't want to get hit with fees for going over your limit. And experts say a credit limit reduction can lower your credit score by 30 to 40 points

The banks will tell you about lowering your available credit, but they just might send the news in one of those envelopes marked, "Important Information About Your Account.' If you aren't going to actually read those letters, you have to keep track of your credit ceiling either by checking online or by reading your credit card statement carefully.

Next: Tip No. 3

Watch for Limit Lowered Below Your Current Balance

Issuers may lower the limit below your current balance, which means you'll have to pay up. Scary, but true. Banks can and do cut customer's credit limits below the current balance, says Kaplan. If it happens, you'll have to pay off your balance above the limit or face late fees, she says. "If you've got a $10,000 limit and a line of $9,000, you could get a lower limit of $7,000."

Keep in mind that a lower limit could hurt your credit score since, just like when cards are canceled, the lower amount of available credit can make your 'utilization ratio,' which is tracked by credit reporting agencies, look higher (that's bad if you want more credit).

Next: Tip No. 4

Rates Could Go Down If You Have Good Credit

Even though there's all this talk about tighter credit, interest rates have actually come down. The average variable rate is now 11.4%, down from 14% a year ago, says Greg McBride, senior financial analyst at Bankrate.com. "If you see your card issuer has been dragging their feet on reducing your rate over the last year, it's time to shop around," he says.

Next: Tip No. 5

More on Shopping Around

It may be harder to qualify for the very best rates. "Those low rate offers are out there, but issuers are much pickier about who gets them," McBride says.

Adds the Banker's Association's Kaplan, "You might see less offers.' And, even when you do get them, "Just because you got the offer doesn't mean you'll get the card,' she says.

McBride recommends comparing offers online. Banks are looking for customers online because postal rates have gotten more expensive. "Reaching prospective customers online is where the growth is," he says.

Next: Tip No. 6

The Market for Reward Cards Is Still Strong

People who pay off their credit cards every month can still get ridiculous rewards. You might think those no-balance folks would be less attractive to issuers, because they're not paying the high interest rates everyone else is. But, you're forgetting that credit card companies also make money off an interchange fee -- typically between 1% and 3% of a purchase -- that the store has to kick back to them.

The latest trend in reward cards are those that give out special points for everyday kind of purchases, says Bankrate.com's McBride. Those cards incentivize consumers to use their cards for every little purchase.

Next: Tip No. 7

If You Want More Credit ...

If you want more credit, act like you don't need it. Banks consider someone who carries a balance to be a higher risk than someone who pays it off each month. So if you want the bank to trust you more, give them back their money. Don't carry a balance -- which, of course, you shouldn't do anyway because it'll cost you a fortune in interest payments.

"Somebody who is carrying a credit card balance is buying something they couldn't afford to pay cash for," says McBride at Bankrate.com. "Revolving a $5,000 balance is a lot different from someone who pays $5,000 off month after month." People who pay off their credit cards every month are using them as a convenience -- or as way to soak the banks for some kind of reward.

Next: Tip No. 8

Get Another Card for Emergencies?

Should you get another credit line for emergencies? No financial expert is going to tell you that the smart thing to do is to go get another credit card. They're worried you'll be tempted to use it. But it's a reasonable impulse to want to have more credit available in case of an emergency. Just be aware that even if you get a new credit line, the bank could always pull it back.

Whatever you do, don't think that because credit is going to be drying up that you should actually spend all your available credit. "Do you need to go and grab borrowed money before gates shut? No, that's not smart financial planning," says fee-only financial planner Al Zdenek. He also urges investors to calm down. The bailout package has not yet begun to work through the system, but eventually it will and credit will loosen again.

"The banks will be turning the taps back on," Zdenek says. "For as bad as the credit freeze situation is now, it's not a permanent situation."

Next: Tip No. 9

Store Credit Cards Will Be Harder to Get

The reason banks have been getting jittery -- aside from the fact they're having a hard time borrowing money -- is that their customers are having a hard time paying their bills because of rising unemployment and the slowing economy.

The American Bankers Association reported in October that for the second quarter personal loan delinquencies rose from 2.55 percent to 2.67 percent. According to the New York Post, store credit cards are facing delinquency rates rumored to be as high as 10 percent. The Post says Target expects to write off 9.86 percent of store credit card sales in August. When delinquencies go up, that means either lending standards or rates are likely to rise soon. Store credit cards could soon be tougher to obtain in the future than bank credit cards.

Next: Tip No. 10

Check Credit Report for Errors

If you think you may need more credit in the next few months, check your credit report for errors. Even if you don't need more credit now, it is smart to check your credit report to make sure it is accurate every six months. There may be an error in the report (for example if credit reporting agencies mistakenly merge someone else's file with yours), or you could be a victim of identity theft and not even know it.

Next: Tip No. 11

Don't Get Another Card If ...

Don't get another credit card if you plan to buy a house or car in the next year; it may lower your credit score. Applications for additional credit cards will be included on your credit report and such inquiries can hurt your credit score, making it harder to get a mortgage or car loan.

To improve your credit score, "Make sure you're not late on any payments. Reduce your total debt load," says Kaplan."The best thing you can do is pay down the credit you do have,' she says. 'That will make you look like a stronger candidate to a bank in the event you do need a loan.

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