A Survivor's Guide to Credit Cards

A few years ago, anyone with bad credit and a pulse could get a credit card albeit with crappy terms. People with good credit could get limits many times their annual income. But we've entered a new age. With the economic downturn, banks have tightened underwriting standards, slashed credit lines, and raised interest rates and fees. This has affected even people with good credit. Understandably, banks are skittish as default rates climb to 8% or more. Never mind that these adverse actions come from some of the same banks that are deep in your pockets as taxpayers. It feels like a double blow.

Several years ago, American Express ran ads about a businessman who took his customers out to dinner only to be embarrassed when his over-the-limit Visa card was declined. But after he got the American Express card with no preset limit, this never happened to him again. That is until now.

AMEX is a good example of a company that has been freezing credit without giving notice to its customers who find out about it only after they get to the cash register. Before turning the card back on, AMEX is known to put these customers through a financial review which may include a demand for release of tax return information not from the customer but from the IRS directly. And this can happen even to people with stellar credit.

The best thing to do in the current environment is to keep below the banks' radar screen. I have synthesized the wisdom of the sages, applied it to my own situation and remain unscathed at least for now.

1. Monitor your credit reports from the three primary credit reporting agencies, Experian, Equifax and Trans Union to make sure the information is accurate. Know what your credit score is. You can get it at www.myfico.com. This will keep you from getting fleeced in any kind of credit transaction because you'll know what rate you deserve.

2. You have to position yourself in this market so that if one company jacks your rates or slashes your credit lines, you can take your business somewhere else on short notice. This means carrying several cards with different banks. If banks think you have nowhere to run, they will screw you.

3. Keep your utilization as low as possible. Below 10% is ideal. Over 50% is bad and 80% makes you an enticing target. To calculate utilization, add up your credit card debt and divide it by the total limits available on your cards. For example, if your total credit lines are $50,000 and you owe $10,000, your utilization is 20%. Higher utilization translates into higher risk and exposes you to adverse action. It also causes your credit score to dive. Banks monitor your reports on a regular basis and will take action if they see you're getting deeper into debt.

4. Pay substantially more than the minimum payment due. Banks think people who pay minimums are in distress. It's a red flag to them.

5. The conventional wisdom says you should apply for new credit only when you need it. I disagree. Only apply for new credit when you don't need it and only for the purpose of enhancing your credit profile in accordance with paragraphs 2 and 3. You'll take a minor credit score hit from the inquiry to your report but that effect will be washed out in many cases because with the larger pool of available credit, your utilization will go down. Don't ask for credit line increases on your current cards unless you are trying to restore a line that has been slashed. But you can backdoor your way into a credit line increase with an existing creditor by applying for a second card and then combining limits with the old card and canceling the new card. Don't try this right after you get the new card. Wait at least three months and then combine.

One reason why combining lines is a good idea is that it raises the average of your credit card limits. Other things being equal, a credit file with an average credit line of $15K, for example, looks more solid than a file with an average credit line of $2K. As you apply for future credit, you will get a higher line because the new bank often matches your current lines. Higher limits beget higher limits. The object here is not to use the credit extended to you. It is to enhance your profile to insulate yourself from a random financial attack.

Another advantage is that you have more borrowing flexibility with higher lines while appearing less risky. Say you want to borrow $10K. It is better to do it on a card with a $50K limit than one with a $12K limit. Borrowing on the $50K card doesn't raise eyebrows but borrowing on the $12K card might because you're close to the limit even though in each illustration you're borrowing the same amount of money.

6. Periodically, ask for APR reductions. If your FICO score is in the mid 700s or higher, there's no reason why you should pay even 10% for purchases as long as you've followed the suggestions in items two and three, above. Even if the companies advertise your card at a higher rate, the odds are good that you can get a deep discount just by calling and asking. It's possible to get standard purchase rates in the range of 4.9 % to 7% from Bank of America, Chase, Discover, and Citibank. Just use your cards regularly, keep your balances low and always pay on time.

People who always pay in full may not see the importance of this because they don't pay finance charges no matter what the rate is. But that's not the right way to think about it. Asking for concessions now when you don't need them is better than waiting until you do because when you do, you can't get them.

7. Most banks report your statement balance to the credit reporting agencies each month. Carrying even small reported balances on multiple cards can hurt your credit score. At the same time, you want to use all of your cards to keep them from getting closed for inactivity. To accomplish this, pay the bulk of your balances down to zero just before the statement cuts. The other way to accomplish this is to rotate periodically the cards you use.

8. With the zero tolerance policy for payments that are even five minutes late and the punitive consequences of paying the standard $35 late fee and having your APRs jacked into the stratosphere, it is crucial that your payments reach the bank on time. Never mail payments. Don't use a bill payer service. Either of these methods can go awry and you'll be the one paying for the bungling of others. The best way to pay is to go directly to the creditor's web site. Print out the transaction confirmation and you'll be safe.

9. Never use your cards for cash advances.

Happy charging.