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Fine print, Protecting yourself

Will cash become king again?

Julie Sherrier

For those of us who don’t work on Wall Street, still have a job and can still afford our mortgage or rent, the global financial crisis so far seems to be this intangible, nebulous threat. Yes, our retirement funds have sunk to new lows. That’s intangible, too, since retirement always appears on the surface to be this unreachable goal, given the constant harping that Social Security is something many of us won’t ever be able to enjoy.

However, reports are surfacing that even for those with good credit, new credit  rules of engagement will be applied, and soon.

Financial experts are warning that the credit card market will tighten up like never before. What used to be standard operating procedure, such as financing large-ticket items such as a new refrigerator or television at Sears or BestBuy, for example, may be forever altered. Used to taking advantage of that 0 percent, same-as-cash financing for 18 months? That may soon become a thing of the past as companies struggle to get access to credit from their banks and pass on that struggle to consumers in the form of high-interest, fee-laden credit, according to a recent article in the Richmond (Va.) Times-Dispatch.

As can be expected, in reaction to the current economic environment, banks have had to tighten up their credit card policies. We’ve heard the accounts of unsuspecting cardholders having their credit limits drastically decreased and their “fixed rate” APRs increased over the past year, but it seems as if consumers adjusted, paid off or canceled their accounts or transferred any balances to other credit cards. But those actions continue. More recently, American Express adjusted down the credit lines of its customers by 20 percent, according to Smart Money. “People with credit scores of at least 720 are not immune,” says American Bankers Association spokeswoman Carol Kaplan to Smart Money. The question hovers, then, is there more to come?

“A hurricane of bad credit card debt will start crashing ashore in the United States in the first quarter of next year, even as the mortgage crisis continues,” say analysts at Innovest Value Advisors, a New York research firm, in an article published by Canada’s theglobeandmail.com. As with those holding subprime mortgage loans, consumers expect people with risky credit to be more heavily scrutinized by their lenders. But what about good credit consumers? “Even consumers who have good credit habits are expected to suffer some as credit card issuers move to minimize their exposure and maximize revenue,” writes Iris Taylor in the Times-Dispatch.

What the credit landscape will look like in the coming years is anyone’s guess, but experts warn that those with good credit will find access to it harder to come by and those cash-strapped consumers relying on credit to get by will get hit even harder. “Credit card companies, meanwhile, are looking to minimize their exposure and pump up revenue in this flailing financial environment,” says financial literacy author Braun Mincher in the Times-Dispatch. That may mean imposing new fees, further reduced credit lines or out-and-out refusing credit to people who previously qualified for it.

“We have adapted our underwriting models as the economic environment has changed,” confirms Capital One Financial Corp. spokeswoman Pam Girardo to the Times-Dispatch. “And we have gotten more conservative on credit-line assignments and line increases.”

“A combination of a 10-year steady drip of deteriorating personal finances and… the mortgage and credit crisis leads us to believe that credit cards” are next, says Innovest’s Gregory Larkin in theglobalandmail.com. Larkin is basing his assumption on increased credit card charge-offs — where consumers default on credit cards — that will further cripple the nation’s banks.

Do I see a return to the days of layaway counters and saving up for large-ticket purchase? Just how much is this financial mess going to push us back to the time when we could only buy what we could truly, honestly, afford?

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  • Because it’s obvious that no one knows what will happen next with the financial markets, it’s best to focus on the factors that we can control and that is spending. At this point, the time tested strategy of living below your means (which for some, might include eating beans and rice for a while) seems to be the only reasonable step you can take until the future becomes more clear. A year from now I expect that we will all still be recovering from the financial damage. September 2008 will be just a memory, albeit a bad one. But the key is we will recover. American’s are not potted plants. Despite the lack of leadership and clear thinking in Washington, we are a clever and resourceful people and solutions will appear. In the meantime, whether already retired or not, keep living below your means and send me any recipes for beans and rice you have.
    Jonathan Edelfelt
    Author of Who Said You Need Millions? Retirement Strategies for the Rest of Us
    http://www.WhoSaidYouNeedMillions.com

  • Doreen Torres

    Chase just reduced my credit line by almost half. I am self employed. I had a good credit score, paid on time and always paid well above the minimum payment. It seems to me that reducing people’s credit limit will just cause their credit score to go down, thus making it harder for them to get credit and causing whats left of the economy to come to a standstill. Meanwhile, I wonder what happened to all the federal funds that Chase Manhattan received at taxpayer expense.
    This smells like the biggest scam in history.