The Federal Reserve reported last week that revolving credit — which is made up almost entirely of consumer credit card debt — fell by $8.6 billion in April, an annualized rate of 11 percent (“Fed: Credit Card, All Consumer Spending Declines,” CreditCards.com, June 5, 2009).

This is the seventh straight month of declines in revolving credit since October 2008 and the longest pullback in revolving credit balances on record since the Federal Reserve began reporting on consumer credit in 1968.

“The trend is certainly toward having less revolving consumer credit outstanding,” said Cynthia Ullrich, senior director at Fitch Ratings in New York.

Overall consumer debt, which also includes nonrevolving debt like auto loans and student loans,, dropped by a total of $15.7 billion in April, for an annualized rate of 7.4 percent — the second largest contraction in consumer debt in history (“Consumer Debt Plunges by $15.7 Billion in April,” MarketWatch, June 5, 2009).

Consumer debt has decreased by $43 billion in just the last three months, after jumping by $131 billion in 2007.

Find information on debt relief and other debt management options at ThinkDebtRelief.com

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In this recession, costly expenses like medical bills are taking a backseat to daily expenses like water, electricity, food, car, and mortgage payments. Now, as with credit cards, consumers are struggling to keep up with their medical bills and increasingly letting more and more of their bills go unpaid.

The Commonwealth Fund, a healthcare research foundation, reports that in 2007, 41 percent of adults were struggling to pay their healthcare bills, up from 34 percent in 2005 (“When Medical Bills Outpace Your Means, Seize Control Swiftly,” The New York Times, April 25, 2009). And it’s not just the uninsured who have fallen behind on their payments, nearly two-thirds of people with medical debt actually have health insurance.

Experts say, however, that there are ways to manage your medical debt even if you aren’t capable of paying it off right away.

1. Communicate with your creditor.

If you know you’re going to be late on one or more of your medical bills, let your creditors know. Just talking with them won’t obligate you to make a payment, but if your creditor is aware that you’re trying to stay on top of your debt you may be able to avoid collections, at least temporarily, and protect your credit.

2. Review your bills.

Keep a running tab of your doctor visits and medical procedures to accurately review your bills when they come in. Errors in medical billing can occur often, so if you find a discrepancy call your provider for an explanation. And remember that it can never hurt to resubmit bills to your insurer if you’ve been denied coverage.

3. Bring in extra help.

Try negotiating with your provider for a discount or for some leeway on repayment. If your creditor still won’t work with you, consider hiring a billing specialist who may be able to help you find errors in your medical bills and better understand the often-complex language of medical billing.

4. Avoid the plastic.

Don’t react with panic when you receive a late-payment notice by transferring your medical bill debt onto your credit card. Chances are if you can’t pay your medical bill now, you’re not going to be able to pay the credit card bill when it comes in later. And medical bill charges that stay on your credit card will immediately start earning interest, not to mention that charging a large sum to your credit card could negatively affect your credit score, if you’re carrying too high a debt load.

5. Know your rights.

Just because a medical bill goes to collections, doesn’t mean creditors have free rein to hassle you into paying; they have guidelines and rules to abide by — they can only call between 8 a.m. and 9 p.m. and they can’t scare you into paying the debt. Ask for the caller’s name and request that they send you the name of the creditor and the amount you owe in writing. Visit the Privacy Rights Clearinghouse for a guide to debt collection.

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“In the previous two decades, our credit scores have become more important over time,” said personal finances expert Liz Pulliam Weston (“Rules Have Changed for Consumer Credit,” Chicago Tribune, April 19, 2009). “Then in the past year, it’s suddenly become critical.”

She warns that if consumers don’t pay attention to these recent credit developments they could make some costly mistakes that could negatively affect their personal finances.

1. Credit Scores

The overhauled credit markets have polarized the world of credit scores: now there’s good credit and bad credit and relatively little in between. Consumers with good credit have seen little to no effect on their financial lives, while consumers with less than stellar credit are increasingly facing higher interest rates, more stringent loan terms, and disqualification from all types of loans — home, auto, student, etc.

The Recommendation: Don’t take on any more debt and start paying off your existing debt.

2. Credit Benchmarks

The qualifications for good credit and bad credit have also shifted. About a year ago a 700 to a 720 FICO credit score — the most widely used credit score formula — was considered acceptable for most consumer loans, and a 620 FICO score was considered subprime and subject to less favorable terms. Today, consumers need a 740 to a 760 credit score to get the most consumer-friendly loan and credit card terms, and consumers with a 660 to 680 score are considered subprime.

The Recommendation: Pull your credit report to see if there are any unforeseen blips or mistakes that could have dinged your score. You can get a free copy of your credit report from each of the major reporting bureaus once a year at annualcreditreport.com. For a free estimate of your credit score, you can use some of the new credit simulators at Bankrate.com, Quizzle.com, or Credit.com to get an idea of where you stand, but if you’re considering taking out any new loan you may want to use a site like MyFICO.com to pull your actual credit score and see where you really fall on the new scale.

3. Credit Limits

Consumers with lower credit scores are having their credit limits slashed by credit card companies, which can severely throw off your credit utilization ratio — the ratio of your available credit to how much you’ve borrowed — and consequently, lower your credit score.

The Recommendation: Consumers with good credit scores, 750 and above, can try negotiating with their creditors to reinstate lines of credit, if need be. Creditors are more willing to accommodate consumers with good credit since they are harder to come by in this recession.

4. Card Cancellations

In addition to lowering limits, credit card companies are shutting down lines of credit due to low use, which may be one of the few credit changes to hurt consumers with good credit.

The Recommendation: Make sure to occasionally use the cards that you keep in the “back of your wallet” — charging some purchases at least a few times a year — and promptly pay off the balances on these cards in full.

5. FICO Score Formula Changes

One of the three major credit reporting bureaus, TransUnion, has begun using Fair Isaac’s new FICO score formula, which places more emphasis on your credit utilization and ignores overdue balances of less than $100. It’s unknown when or if the other credit bureaus, Equifax and Experian, will follow suit.

The Recommendation: Keep balances to below 30 percent of your available credit, and if possible, try to bring your credit utilization down to 10 percent to get better interest rates and more favorable borrowing terms on consumer loans.

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Banks are closing these inactive accounts in an effort to minimize the risk of having financially-strapped consumers who, in a worsening economy with already limited credit options, may choose to run up balances on long-unused credit cards that still have available credit.

J.P. Morgan Chase is lowering the credit limits of customers who the bank perceives to be “risky,” and Bank of America is “closing accounts with zero balances that have been inactive for more than a year and may adjust customers’ credit lines up or down” based on “their risk profile and performance,” a Bank of America spokeswoman told The Wall Street Journal.

American Express Co., US Bancorp, Washington Mutual Inc., and Wells Fargo & Co. are also reducing the credit limits of cardholders who carry high balances or who’ve made late payments, according to a July credit card survey by Consumer Action, a national consumer education and advocacy group.

In all, about 20 percent of banks have reduced credit limits on the existing credit cards of prime borrowers, and 60 percent of banks have lowered limits for nonprime borrowers, according to a Federal Reserve survey of senior loan officers from October.

With lower credit lines and less access to credit, consumers could see their credit scores drop and may find it harder to get a loan.

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This month federal regulators agreed to impose some of the most sweeping limitations on the credit card industry seen in decades, preventing credit card companies from raising interest rates on consumers’ current credit card balances.

The new rules, which go into effect in July 2010, state that card companies can only raise interest rates on new credit cards and future purchases or cash advances, unlike now when companies’ credit card contracts allow them to raise consumers’ interest rates indiscriminately and with little warning.

“These protections will allow consumers to access credit on terms that are fair and more easily understood,” Federal Reserve Chairman Ben Bernanke said in a statement.

What the Regulations Mean For You

Fees. Creditors can’t penalize you with high fees for exceeding the limit on a credit card that gets placed on hold. And creditors can’t charge you a security deposit or other fees just for issuing you credit or making credit available.

Billing. Creditors can’t double-cycle bill you, meaning that banks can’t charge you interest on balances that you carry over from one billing cycle to the next. You can only be charged interest on the balance amount that remains unpaid, not the full amount you previously owed.

Balances. Lenders who have borrowers with multiple credit cards will be required to apply any payment that borrower makes above the required minimum toward the borrower’s lowest-rate balance.

Terms. Lenders will be required to give you 45 days notice before they can make any changes to the terms of your account.

Late payments. Creditors have to give you a reasonable period of time to make your payment before it can be considered late.

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Retailers such as Wal-Mart, J.C. Penney, and Target say they have noticed a definitive shift away from credit card use in recent months. In fact, for the first time since 2001–2003, Target has seen a reduction in credit card use at its stores.

And, for the first time in 17 years, J.C. Penney reports that it has experienced spending swings around payday cycles, when consumer spending drops immediately before a pay period and increases significantly following immediately after a pay period. The last time the department store chain experienced notable payday swings was in 1991 when the United States was about to enter a recession, said Ken Hicks, Penney’s Chief Merchandising Officer.

Even at Wal-Mart, where spending swings are often more common, consumer spending around paydays has become more pronounced especially since September, indicating that shoppers appear unable to purchase necessities just days before they receive their paycheck, said Tom Schoewe, Wal-Mart CFO. After growing at rates in the double digits over the past three years, credit card payments at the big-box store giant have fallen by 7.4 percent in the last year compared to all other forms of payment.

Consumers may be using credit cards less not only due to decreased spending limits, but also because, in general, credit is tighter; credit card issuers are extending fewer credit card offers to consumers, particularly those who are heavily indebted or who have found themselves newly unemployed.

Data from the nation’s major credit card issuers, Visa, Master Card, and American Express, indicates that the number of credit cards a consumer possesses fell 5 percent last quarter compared to the previous quarter, said Laura Nishikawa, an analyst with Innovest Strategic Value Advisors, a Wall Street investment research firm.

“Consumers are really struggling to find sources of cash to make purchases,” said Scott Hoyt, senior director of consumer economics for Moody’s Economy.com. “The rapid job losses are taking a big bite out of labor incomes. Obviously, it’s making it much more difficult to borrow.”

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During the same period last year, Citigroup earned $169 million from selling bonds backed by credit card debt (“Citigroup Says It Lost $1.4B on Credit Card Bonds,” Associated Press, Nov. 3, 2008).

With more financially stricken consumers struggling to repay their debts, analysts expect that Citigroup and other credit card issuers could continue to see escalating losses through next year, as consumer delinquencies mount and write-offs of unpaid consumer credit card debt continue to snowball.

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Consumer credit counselors say these consumers are not only unwilling to discuss their credit card debt with strangers, they’ll even go to lengths to hide it from their spouse or partner.

“We see people telling us they had the credit card bill sent to a parent’s house, a post office box, or e-mailed instead of going to their homes,” says Michael McAuliffe, president of Family Credit Management, a Chicago-based nonprofit consumer credit counseling agency.

Some people seem even to want to hide their debt from themselves. In over their heads in credit card debt, some consumers will walk into credit counseling centers with bags of unopened credit card bills.

“Some consumers just don’t want to face it,” says McAuliffe.

The CreditCards.com poll, which presented the same 12 topics to a representative sample of 1,000 people, found that financial issues — credit card debt, salary, and housing costs — overwhelmingly dominated the group of topics the respondents were least willing to discuss:

1.	Credit Card Debt	80%
2.	Love Life	78%
3.	Salary	77%
4.	Mortgage / Rent Payment	69%
5.	Health	58%
6.	Death of a Loved One	49%
7.	Weight	47%
8.	Religious Views	37%
9.	Political Views	36%
10.	Age	26%
11.	Gas Prices	13%
12.	Weather	8%

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Outstanding credit card debt has grown by more than 75 percent since 1999, Innovest notes, with consumers running up higher balances on their credit cards and paying off smaller amounts of their credit card debt each month.

The average credit card balance at Citibank is up 20 percent compared to last year, while only one in five Citibank customers is paying monthly credit card bills in full. At Bank of America, fewer than one in 10 customers pay off their total bills each month.

The report’s authors, Gregory Larkin and Laura Nishikawa, believe these trends have set the stage for mounting borrower distress and that card issuers will see a rash of credit card defaults in the coming year, leading to sweeping charge-offs — the total value of uncollected credit card balances that a bank writes off, counting it as a loss.

As the economy worsens and credit card companies hit customers with higher fees and interest rates in an attempt to recoup losses from already-defaulted accounts, even more customers will default on their credit cards, Larkin and Nishikawa explain, with issuing banks standing to lose $1 on every $10 they’re owed.

“A long build-up in consumer indebtedness, deteriorating economic conditions, and a potential ‘sudden stop’ in credit availability could cause charge-offs to rise dramatically into 2009,” Larkin and Nishikawa write.

Capital One Could Experience Highest Charge-Off Rates

Capital One, considered “worst-in-class” by Innovest standards, may be the most at risk of having customers default on their credit cards because of its aggressive marketing strategies and “fee-trapping” practices such as issuing low limits on the majority of its cards, which are more likely to cause customers to incur over-the-limit fees.

The bank’s customers are already showing signs that they’re straining to keep up with their credit card debt — charge-offs at Capital One are at 6.3 percent and climbing, Innovest reports.

Capital One CEO Richard Fairbank contends that his company is prepared for any hard times ahead, arguing that the credit card business is resilient and not subject to the same issues of collateral value that have devastated the mortgage industry.

“In our U.S. card business, we’re taking many actions to navigate the current downturn,” he said.

Like other card issuers, Capital One is likely becoming choosier with its credit card applicants at the same time that it re-evaluates its current customers, lowering credit limits and curtailing discounts on balance transfers in order to mitigate its risk from consumers who won’t be able to make their credit card payments.

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Documents filed with the Securities and Exchange Commission revealed that Target Corp. wrote off 9.86 percent of its $8.7 billion credit card portfolio in August as uncollectable debt — an increase of almost 10 percent over the previous month and a walloping 74-percent hike since last August, when charge-offs totaled just 5.66 percent.

The current charge-off rate is now already significantly higher than the 7– to 8–percent rate Target had at one point projected for the year and could rise as high as 12 percent within the next six months, said William Ryan, an analyst at New York equity research firm Portales Partners.

Todd Slater, an analyst at Lazard Capital Markets, noted that Target’s credit card delinquencies “increased to the highest level we have seen, while charge-offs increased to the highest level since the bankruptcy law changed in October 2005.”

Some financial analysts attribute the retailer’s rising charge-offs and delinquencies to the fact that debt-ridden consumers are struggling to make their monthly credit card payments at the same time they’re paying more for basic necessities like food and gas.

Other analysts say the depressed housing market is hampering consumers’ ability to pay down their credit card debt, noting that 25 percent of Target stores are in states that have been hardest hit by the foreclosure crisis and declining home values — Arizona, California, Florida, and Nevada.

“We believe many consumers were using the equity in their homes to reduce revolving credit card debt,” said Jeffery Klinefelter, an analyst at investment banking firm Piper Jaffray. “Now, this avenue of ‘debt relief’ is largely gone.”

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