The credit crisis seems theoretical and far away -- until the bank starts messing with your credit card. Many consumers are finding the first place they're seeing tangible evidence of the crisis is when credit card issuers cancel their accounts or lower their limits -- sometimes even below their current balance.
Many consumers aren't thinking of buying a house right now because they're worried the housing prices may slide a lot further. According to the National Association of Realtors, 70% of people who don't own a home already don't plan to buy one in the next year -- and many cite tight mortgage restrictions as a reason.
For now, where most people will get hit is on smaller loans, like those for cars and revolving credit on a credit card. Here are some tips from the experts on what's ahead and what strategy you may want to play:
Credit limits are being cut. Carol Kaplan, spokeswoman for the American Bankers Association says banks are lowering credit card limits. "They're being much more conservative about who they're giving loans to because they can't afford to take any more risk," Kaplan says.
That means if you've kept a high balance but left a little cushion under your limit, your cushion may have vanished.
You actually have to read those letters from the bank. The banks will tell you about lowering your limit. But they just might send it in one of those envelopes marked "Important Information About Your Account" that you've grown accustomed to immediately trashing.
Okay, you don't have to actually read those letters. But you do have to keep track of what your credit ceiling is somehow -- either online or by reading your credit card bill.
Banks can actually cut your credit limit below your current balance. 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."
Your mailbox may be less stuffed with credit card offers. Credit card companies are getting pickier and cheaper -- not wiser about how annoying their junk mail is. Greg McBride, senior financial analyst at Bankrate.com, says credit card companies are looking for customers online because postal rates have gotten more expensive.
"Reaching prospective customers online is where the growth is," McBride says.
"You might see less offers," says the Banker's Association's Kaplan. "Just because you got the offer doesn't mean you'll get the card."
People with lousy credit may not get cards. Banks are being pickier about giving out cards. With the economy tough, they know people are going to have a harder time paying off their debt.
"What banks are doing are examining the credit profiles of customers, taking a harder look at which consumers pose the greatest risk of not being able to pay," says Kaplan. "Late payments, high debt to credit ratio, all of those things are going to go against you."
People with great credit should shop for great rates. 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 Bankrate.com's McBride.
"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," McBride says.
But 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.
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, those who haven't charged anything in years.
"What were seeing happening in some cases is that people have a credit card that has a $10,000 credit line and hasn't used it for several years. They kept it just for emergencies," says Kaplan of the American Bankers Association.
"You just may get a letter in the mail saying your account is closed for inactivity," Kaplan says. "They want to limit their risk."
If you want more credit, act like you don't need it. Banks consider someone who carries a balance as a higher risk than someone who pays it off. 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.)
"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 a way to soak the banks for some kind of reward.
People who pay off their credit cards every month can still get ridiculous rewards. Credit card companies love people who pay off their credit cards every month. Like we said above, those people are less of a risk.
You might think those no balance folks would be less of a money-maker, too, because they're not paying the high interests 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 in every little purchase. (So basically you put everything on your miles card, the store has to raise prices for everybody, but you get a "free" trip.)
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. And, don't take out a new credit card if you plan on getting a mortgage or car loan soon. The new card may briefly mess with your credit score.
"Make sure you're not late on any payments. Reduce your debt load," says Kaplan to prospective borrowers. "The best thing you can do is pay down the credit you do have. That will make you look like a stronger candidate to a bank in the event you do need a loan."
Whatever you do, don't think that because credit is going to be drying up that you should actually spend your 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."
Everyone's having hard time paying off their credit cards. The reason banks have been getting jittery -- aside from the fact they're having a hard time borrowing money and all -- is that their customers are having a hard time paying their bills because of unemployment and the slowing economy.
The American Bankers Association reported in October that for the second quarter personal loan delinquencies rose from 2.55% to 2.67%. According to the New York Post, store credit cards are facing delinquency rates rumored to be as high as 10%. The Post says Target expects to write-off 9.86% of store credit card sales in August. When delinquencies go up, that means either lending standards or rates are likely to rise soon.
For a quick review, see our slideshow of credit card tips.
Credit card companies cracking down on customers