“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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To protect yourself from being added to this list of displaced tenants, the Associated Press recommends three steps for checking up on your landlord’s financial stability:

1. Search county courthouse records. Sift through the district court or county recorder’s office records in person or online to see if they show that county has filed any foreclosure actions against your landlord. You can also check to see if there are any records indicating that your landlord has ever filed for personal bankruptcy.

2. Call the Better Business Bureau. Ask if there are any complaints on file against your landlord. Maybe previous tenants left with good reason: your landlord wasn’t financially responsible.

3. Look at your rental property with fresh eyes. Do a walk-through of your residence and look for any signs of neglect. Are there repairs your landlord hasn’t followed through on? A lack of maintenance on the home could be a sign that your landlord can’t afford the upkeep of the house or doesn’t want to spend the money to fix up a property that’s about to go into foreclosure.

If you discover that your landlord is headed toward foreclosure, check out our tips on what you can do to keep a roof over your head and soften the blow.

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TJ Smith of BadCreditOffers.com says the study highlights a disturbing trend that has surfaced in the last few years, “Since 2000 the median U.S. income has remained flat while the cost of virtually everything has skyrocketed, leaving the average American with less money to pay debts.” As a result, he says, consumers have fallen behind on their payments, and their credit ratings are starting to suffer.

Many experts believe the current credit crisis was brought on largely by individuals with poor credit who took advantage of readily available subprime mortgage loans that, now, they can’t repay.

As delinquencies skyrocket on all types of loans and lines of credit, some analysts expect that the state of Americans’ personal finances could only get worse; consumers with declining or already poor credit may not get approved for new lines of credit and could experience interest rate hikes on existing loans.

“Unfortunately this trend toward bad credit will likely continue in the near-term, as people struggle to make payments on their homes, their cars, and their credit cards,” Smith said. “In fact, we expect a spike in credit card defaults in 2009 similar to what we’ve seen in the mortgage market in the last 24 months, leading to further deterioration of credit ratings for many Americans.”

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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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Now, with Christmas just two months away and most of staring at limited holiday budgets, some retailers are offering us a budget-friendly, no-debt alternative to credit cards for our holiday shopping. Discount chains like Kmart and Burlington Coat Factory are reacquainting us with layaway — the practice that allows us to put store items on hold while we pay them off in incremental payments with no interest charges added.

Some Marshalls and T.J. Maxx stores, as well as most A.J. Wright stores, also offer layaway as a payment option, and two notable e-merchants have built their business models specifically around offering layaway to online shoppers. There’s Lay-Away.com, which features mainly appliances and electronics, and eLayaway, which offers a wider variety of products and allows you to buy items on layaway at more than 1,000 online stores.

Looming Recession Brings the Resurgence of Layaway

Layaway, widespread during the Great Depression, mostly disappeared during the 1980s and ’90s with the proliferation of credit cards and the economic boom.

“Layaway really was a great deal and kind of a way to force people to budget their money,” says Edgar Dworsky, editor of the Internet consumer resource guide Consumer World (“Layaway Message Resurrected for Holiday Shoppers,” The Associated Press, Oct. 22, 2008). “People don’t have the discipline to do that today.”

But as more of us steer away from credit card debt in the current financial environment, the demand for layaway — spurred by renewed notions of budgeting and saving — has soared. Traffic at eLayaway has skyrocketed by 91 percent over the last year, reports The Wall Street Journal (“Layaway is Making a Comeback,” Oct. 22, 2008).

Layaway: How it Works

Each store’s policy varies, but the general idea is the same: You find something you want; you pay a small layaway fee upfront for the store to hold the item; you make payments little by little; and in a few weeks, the item is yours to take home.

Although layaway is available throughout the year, it can come in especially handy right now, as the holiday shopping season gets underway.

Let’s say, for example, one of your kids is dying for a Nintendo DS, which retails for $130, for Christmas. For $18 (a $5 layaway fee, plus a 10–percent down payment), you can put the game system on layaway at Kmart and pay it off over the next eight weeks — just in time for Christmas — with a $28 payment every two weeks, plus any sales tax.

At eLayway, you can make payments either twice or once a month, and your 1.9-percent layaway fee ($2.47 on the Nintendo DS) plus any shipping and taxes are included in your monthly payments.

“I remember growing up with layaway, and it seemed like the fee was reasonable,” 41-year-old John Pace tells The Wall Street Journal. “And this way I don’t max out a credit card.”

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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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Here, from The Sacramento Bee, are five pointers to help you find and choose a personal finance advisor:

1. Get personal recommendations.

   As with any other service, when picking a financial planner, you should choose someone who you know has a proven track record. Ask friends and family not just who they would recommend to manage your finances, but why, so you can get a better idea of which recommended advisors you might work best with.

 

2. Research background and credentials.

   Make sure that the candidates you’re considering to handle your finances have the necessary educational background, hold a clean compliance record, and are properly certified and licensed. Verify certifications and licensing with the Certified Financial Planner Board or other relevant professional organizations.

   Look for financial advisors with at least five years’ experience, who have had some time to grasp the ebb and flow of the markets and whose expertise fits your financial needs.

   Keep in mind that if your needs have more to do with personal taxes or estate planning, you may be better served by meeting with an accountant or an attorney.

 

3. Schedule face-to-face appointments.

   Meet with at least three financial planners in person before you make a decision. See if they can speak about your finances in terms that are easy for you to understand, and grill them as much as you need to in order to gauge how knowledgeable they are in their advertised area of expertise.

   Pay close attention to how much of what they say is a sales pitch and how much of it is solid, fact-based advice.

   “The biggest mistake people make is being very heavily influenced by the advisor’s personality and sales skills,” says Jack Waymire, author of Who’s Watching Your Money: The 17 Paladin Principles for Selecting a Financial Advisor.

 

4. Ask for fee and compensation structures in writing.

   Find out ahead of time whether you’d be paying a potential advisor a flat fee, an hourly fee, or a fee based on a percentage of your investment assets, and whether these fees are payable in a lump sum or in installments. Get fee schedules in writing, and make sure that any payment arrangements a financial planner agrees to in discussions with you will be binding.

 

5. Nail down accessibility.

   Being able to easily get a hold of your financial planner in an emergency situation, especially right now, as the global markets teeter on instability, will be critical, both for your investment portfolio and for your peace of mind. Ask potential advisors about their preferred form of communication, whether it’s by phone, e-mail, or in person, and find out what their after-hours availability and return-call policies are.

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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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The consumers currently most at risk of getting their credit limits cut, reports The New York Times, are those who live in areas that have been most affected by the housing and foreclosure crisis, who have run up big debts, or who work for themselves in troubled industries. Even responsible consumers with on-time payment histories may find themselves on the receiving end of a suddenly curtailed spending limit.

“Credit lending standards are tightening across the board, it doesn’t matter how great your credit score is,” says Carol Kaplan, a spokeswoman for the American Bankers Association (“Consumer Credit Limit Crackdown,” CNN Money, Sept. 26, 2008). “This is happening everywhere, to everyone.”

3 Tips to Avoid Getting Burned by Credit Limit Cuts

When your credit card company springs a limit reduction on you, especially if you don’t find out about the change until after the fact, it’s easy to inadvertently go over your credit limit, incurring expensive over-the-limit fees and an over-limit blotch in your credit card history — which, in turn, could lead to yet another limit reduction for irresponsible spending.

To avoid getting caught by surprise and incurring any fees, use these three tips to stay on top of your credit card accounts and any changes your card issuers make.

1. Read the fine print.

   Look over your credit card statements closely each month to see if your credit limit’s been lowered. If you’re thinking of making a large purchase before you’ve received your most recent statement, call in and check your limit by phone.

   Most credit card companies reserve the right to cancel or adjust your credit limit at any time, regardless of your payment or credit history. They also have up to 30 days to notify you of a credit limit change — meaning you may not receive a notice about a reduction in your credit limit until after it’s already gone into effect, so it’s up to you to monitor for any changes as they happen.

 

2. Sign up for balance alerts.

   Some credit card companies will send an electronic alert to your e-mail or cell phone when your balance is approaching your credit limit. Turning on these notifications may help you avoid getting hit with a surprise over-the-limit fee if your credit limit gets cut unexpectedly.

 

3. Don’t react hastily.

   If your credit limit does get cut back, don’t automatically cancel your credit card; doing so could negatively affect your credit score by raising your debt-to-limit ratio — reducing your total available credit (from all your credit cards) even as your outstanding credit card balances stay the same.

   Cancelling a card could also hurt your credit if that card is one you’ve had open the longest: The length of your credit history will account for 15 percent of your FICO score. Generally, it’s a good idea to keep these established accounts open.

   Instead of closing your account, call your credit card company, request to speak to a supervisor, and ask the supervisor to re-institute your original credit limit.

   If that doesn’t work and you’re willing to let that card go and absorb any hits your credit may take, consider whether you want to find a replacement before you actually cancel the card. You may want to leave the account open while you shop around for a new card that offers you a lower interest rate and a higher line of credit. Just keep in mind that every credit card application you fill out will show up on your credit report as a credit inquiry, and multiple inquiries in a short period of time could negatively affect your credit score as well.

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