Shoring up your credit

By Gail MarksJarvis

June 22, 2008

There is no leniency.

Credit card companies and banks are worried that people are drowning in debt and will fall behind on payments. With home values declining and banks wary of handing out loans, outlets for escaping overwhelming debt are limited.

Consumers are finding themselves caught. Card companies are getting tougher, sometimes canceling unused cards or raising rates seemingly for no good reason. And 30 percent of banks said in a recent Federal Reserve survey that they had tightened standards on consumer loans.

"The rules have changed," said Gerri Detweiler, author of the Ultimate Credit Handbook and analyst for Credit.com.

And delinquencies on consumer credit are rising. According to the American Bankers Association the level of delinquencies - or people behind on payments - recently was the highest in almost 16 years.

To try to fend off higher rates and other consequences, analysts say, consumers cannot afford to continue lax financial practices. Looking like a bad risk can keep people from obtaining affordable loans on homes or cars and end up with painfully high credit card interest rates. So whip your finances into shape.

The impact of running up debt and missing payments can be tremendous. Say you have $5,000 in credit card debt and your interest rate is 12 percent. If you pay $100 a month you won't pay off the card in full for almost 25 years. During that time you will not only have to pay off the original $5,000, but you also will be spending about $4,700 in interest.

If you miss a payment along the way the pain can become much worse. Credit card companies often reserve the right to increase your interest rate to higher levels if you miss payments - even if your payment just was bogged down in the mail.

Under a new law they are limited in what they can do with an outstanding balance. But that doesn't stop them from imposing higher rates on your future purchases.

We are often told not to spend more than we earn, but many have no way to gauge that.

If you find that when the car needs new tires you must turn to credit cards because there is no cash on hand, it often means you haven't figured out how to make your pay last through the month. That's different from not having enough money.

The key is to set up your accounts so they are foolproof.

First, calculate what you spend now. You will need to look at your checkbook and credit card statements to see where your money goes each month. Look at the past two months, and then hunt for annual expenses or biannual expenses such as property taxes.

So you don't fool yourself into underestimating all the impulse spending you do, keep a notebook handy for a couple of weeks and write down everything - all the little purchases that strip away more cash than we imagine.

Once you have the data, add up everything you spend in a month - including monthly allocations of the annual expenses. Then put each expense into one of four categories to see if your priorities are in sync with your needs. The categories:

•Essentials such as rent or mortgage payments, electricity, water, food, car payments, etc.

•Entertainment or fun, or what you enjoy rather than need - everything from vacations to a movie rental.

•Future expenses such as tires for the car, maintenance for your home, and retirement savings.

•Income taxes, Social Security and Medicare.

Then subtract all of these expenses from your gross pay, or the amount you are paid before taxes are subtracted. When you do this you will see immediately if you have been spending more money than you make. If you are, you will have to look for ways to reduce spending. Otherwise, the result will be inevitable. You will waste money on debt and take a chance on ever-higher interest rates that will sink you into a deeper hole.