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 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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The average credit card balance nationwide only rose one-third of 1 percent to $5,729 for the fourth quarter of 2008, compared to the 4-percent increase TransUnion recorded at the end of 2007. This marginal increase in credit card spending may be a sign that “consumers are becoming more conscientious about their credit card debt,” says Cliff O’Neal, TransUnion’s senior director of corporate communications (“TransUnion.com Quarterly Credit Card Analysis Reveals Delinquency Rates up 11 Percent from Previous Quarter,” TransUnion, March 9, 2009).

Similarly, delinquency rates — the measure of credit card borrowers who are at least 90 days past due on their accounts — rose only 1.21 percent at the end of 2008, a slightly smaller increase than the year-end figure of 1.36 percent for 2007.

Despite these slight improvements, TransUnion predicts that, as the unemployment rate continues to rise, Americans will continue to fall behind on their credit card payments, reaching a 1.8-percent delinquency rate by the end of this year.

However, the credit bureau is quick to point out that the survey also reveals that Americans are altering their credit-use and debt-repayment habits to possibly avoid being caught without available credit “in a pinch” as credit card issuers, in an effort to minimize their risk, are increasingly slashing credit limits and closing inactive credit accounts.

Discover has already closed 3 million inactive accounts and plans to close an additional 2 million, while Capital One is suspending the accounts of all borrowers who have not used their card in 12 months. Bank of America has closed all zero-balance accounts that have been inactive for at least one year (“Credit Card Issuers: Buy Something or Else!,” The Wall Street Journal, March 12, 2009).

“With all the messages out there about limits being reduced and interest rates going up, people have started to focus on making sure they manage the cards they have,” says Steven Katz, TransUnion’s director of corporate communications.

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To help offset their record losses, some of the nation’s largest lenders Capital One, Citibank, and HSBC are raising interest rates for millions of consumers with certain credit cards.

Capital One informed some of its borrowers that it is raising interest rates to 17.9 percent from 12.9 percent – a 5-percent increase – in order “to reflect the current risk environment,” says bank spokeswoman Pam Girardo. For consumers who owe $8,000 in credit card debt – the average debt amount an American household carries – the interest they would accrue on that credit card with the 17.9 percent interest rate, if they made no new charges on the card, would amount to $1,577 if they paid off the card in two years, or $3,260 if they paid off the card in four years.

JPMorgan Chase is tacking on a $120-a-year fee and is more than doubling the minimum payment – from 2 percent to 5 percent of the credit card balance – for hundreds of thousands of borrowers who have low fixed-interest rate cards. JPMorgan gave some of these borrowers a choice between accepting a higher interest rate of 7.9 percent on their promotional balance of 3.9 percent or making a higher minimum payment on top of the new monthly fee.

While the Federal Reserve and other bank regulators have approved new credit card regulations meant to protect consumers from interest-rate increases like these and other unfair credit card practices, the new rules aren’t scheduled to take effect until July 2010.

“We’re all going through an economic crisis right now, and we need reforms that will help consumers now,” says Bill Hardekopf, CEO of LowCards.com.

Sen. Charles Schumer, a member of the Banking, Housing, and Urban Affairs Committee, says the “type of tripwire pricing” lenders are engaging in “is predatory and must end.”

But Ken Clayton of the American Bankers Association cautions lawmakers that any additional crack down on banks could “send further chills in a market already in a deep freeze.”

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With increasing frequency some credit card companies are relying on “behavioral analysis” to not only detect suspicious purchases and protect customers from fraud, but also to determine if a customer’s behavioral patterns indicate that the customer poses a credit risk to the bank itself.

Cardholders who are deemed a risk are getting their credit limits reduced, which could negatively affect their credit score since a reduction in available credit will often affect the ratio of a cardholder’s available credit to credit that is in-use.

Even cardholders who are in good standing with their creditors, but who shop at stores where customers generally have a poor record of repaying their debts could see their credit limits lowered. Kevin Johnson, an American Express customer who has a credit score of 764 out of a possible 850 – considered an “excellent” score by most experts – saw his American Express credit card limit slashed from $10,800 to $3,800 despite his solid credit history with the company.

In a letter sent to Johnson, American Express said among its reasons for reducing his credit limit was the risk posed by other borrowers who had similar shopping histories, a practice called “behavioral scoring.”

“Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express,” the company explained.

Banks Use Data-Mining to Sniff Out Risky Borrowers

Banks may soon use customer data to “weed out” cardholders who are living in zip codes hardest hit by the recession and whose purchasing behavior suggests they are risky borrowers, which Robert Manning, director of the Center for Consumer Financial Services, says is a credit reporting procedure that has been made easier and faster since 9/11.

“Many people don’t understand how almost every transaction they make today could trigger a readjustment in bank analytics,” he said.

Manning, also author of the book “Credit Card Nation,” says more financial institutions may be using behavioral analysis to cut off risky customers before the banks take a loss.

“They’ve crossed the ethical line,” Manning said, “in terms of looking at where you’re spending your money and making a judgment about whether that’s a good or bad decision for you to make given these financial times.”

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An online survey conducted in October by BettyConfidential.com, a website geared toward women, found that 12 percent of more than 100 parents polled were cutting back on child care.

To fill in the gap, some parents are asking employers for earlier or later shifts that would allow for one parent to always watch the children while the other one works. Others are asking for permission to either work from home or even to bring the kids to the office.

Others yet are tapping  their parents for help – some 40 percent of grandparents who live near their grandchildren are regularly providing child care, according to the National Association of Child Care Resource and Referral Agencies.

3 Ways to Trim Child Care Costs With Little Disruption

While child care experts say children typically aren’t harmed by attending day care less frequently, if you must cut back on some day care time they say there are three things you should try to avoid:

1. Taking preschoolers out of group care entirely. Preschool can help facilitate child development when children are between the ages of two and three.
2. Placing your children in the care of someone who may not meet their needs. The bond between a caregiver and a child should matter the most when choosing a day care provider.
3. Showing your stress. The transition to a new child care provider can be a constructive experience as long you stay positive and make a point to only discuss your financial worries behind closed doors.

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Online retailers in particular, hoping to lure spending-weary consumers who might be enticed to buy only if the price is right, are offering steep discounts with coupons and secret codes.

Consumers just have to be willing to “punch in a secret code or visit a rebate site for a ‘referral’ before loading up their virtual cart,” writes Claire Cain Miller for The New York Times (“In Lean Times, Online Coupons Are Catching On,” Nov. 26, 2008).

Before you spend another dime, check out these websites to see if you can score a discount for your grocery store or favorite retailer:

1. RetailMeNot.com. Find coupons for more than 20,000 stores from grocery stores to clothing retailers, and see how other consumers rate the reliability of the coupons.
2. FatWallet.com. Sign up to get cash back when you make purchases from any one of FatWallet’s affiliate “Cash Back” stores.
3. CouponMom.com. Find discounts that could help you cut your grocery bill in half.
4. CouponCode.com. Print out coupons and find free shipping deals for everything from school supplies, to shoes, to electronics.
5. CouponCabin. Browse the site’s “deals expiring soon” category to get last-minute savings for online merchants, or sign up for weekly e-mails on new coupon deals.

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In his report “The Cost of Anchoring on Credit-Card Minimum Payments,” Dr. Neil Stewart found that the psychological phenomenon of “anchoring” — when arbitrary and irrelevant numbers bias people’s judgments — can take affect when consumers are presented with a minimum payment amount on their credit card bill.

While the majority of consumers surveyed about their credit card payment habits said they repaid their bills in full each month, regardless of their suggested minimum payments, 36 percent of the consumers surveyed indicted they are swayed by the suggested payment amounts..

These consumers make only partial credit card payments — payments higher than the suggested minimum, but not enough to cover the balance. In these instances, Stewart found, the amount they paid toward their bill was “closely correlated” with their bill’s suggested minimum payment — “the lower the required payment, the lower the actual payment made.”

Stewart explains, when minimum payments influence consumers to make lower payments on their bills, their interest charges increase as does the length of time it takes consumers to pay off their debt, costing them double the amount of interest over the lifetime of the debt.

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In the last 10 years consumer debt has skyrocketed, with credit card balances rising 75 percent since 1999, while family wages have only gone up 4 percent during that same time.

This year in particular, defaults on credit cards are up substantially. As of September, Americans had accumulated $971.4 billion in revolving consumer debt, a 3.4-percent increase over 2007.

These numbers aside, adds Adam Levitin, a law professor at Georgetown University, credit card debt can be considered the barometer for financial problems because families tend to rely on their credit cards when unexpected expenses such as medical or funeral bills arise. Add to that mix a loss of income due to unemployment, and it’s not hard to see why people are struggling to pay their credit card bills and why “Credit cards are in line to fall,” Levitin says.

Record Charge-Offs Suggest Trouble Ahead

In the past, credit card companies have been able to weather economic downturns since they could boost their earnings by increasing customers’ interest rates and fees. Today, however, consumers who are already financially overextended and who have fallen behind on payments are tapped out and are defaulting on their debt in record numbers.

The net charge-off rate — the value of uncollected credit card balances a bank writes off as a loss — could hit 10 percent by 2009, double the yearly default average over the last decade, predicts Innovest Strategic Advisors, an investment research firm. Total charge-offs may reach $18.6 billion during the first quarter of 2009, and just under $100 billion by the end of next year.

“With charge-offs rising so fast and beyond what was expected, the losses those cause will far surpass what companies were hoping to make up with by extra card fees and higher interest rates,” said Laura Nishikawa, an Innovest analyst.

Not only would a credit card collapse wreak havoc on the nation’s credit card companies, explains Joseph Perella, CEO of private financial services firm Perella Weinberg Partners, it would put even greater strain on an already floundering financial sector in which weakened financial companies are at the root of the problem (“Looming Credit Card Debt May be Next Crisis,” Reuters, Nov. 13, 2008).

“Unlike collapses of the past, where the finance industry just brushed it off, kept going, they’re right there at the vortex of the storm,” Perella said. “The industry is the problem, it’s not a subset of it. It’s not a containerized explosion.”

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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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