Friday, October 10, 2008

Credit in Tough Times

Here is an interesting thought: in tough times, spend less and save more. I know that my wife and I have been watching our spending much more closely in recent months, and it appears that we are not alone. Finally, it looks like the American people are getting the message.

Which is why, for the first time since 1999, credit card borrowing is down. Take a look at this CNN article on the subject, but here is the punch line:

"The annual rate of consumer borrowing fell 3.7% last month. Credit card borrowing decreased at an annual rate of 0.8% while non-revolving borrowing, including student and auto loans, contracted by 5.4%."

That's actually quite impressive. You see? It looks like when it comes right to it, the American people can actually reduce spending. However, under the circumstances I am not clear whether this is folks being fiscally responsible; people simply running out of cash; or credit card companies reducing credit limits. The outcome appears to be positive, but I am not quite sure if the motives are completely healthy or not.

The news is not all good though... (actually, there is very little good economic news these days, but you get my meaning). With two thirds of the economy powered by consumer spending, the fact that people are reducing spending will no doubt reduce growth and will hit the economy that much harder. However, if that's what it take to make us realize that we have to live within our means as a nation, than it's probably about time that we learned the lesson.

So what's the right way to deal with credit cards in a time of crisis? Actually the right method remains the same in good times and in bad. Here are the rules my wife and I live by:

1. Pay it off - every month, no exceptions!

2. Essentials Only - If you know you'll have trouble paying off your card, buy exactly zero non-essential items (and that new computer or sofa are not essential).

3. Track Your Spending - make sure you know where every penny went and why.

4. Get the Right Card - since we pay off our cards every month, it makes sense for us to carry cash-back reward cards - which last year generated about $1,000 in income for us. If you are going to carry ANY balance at all, you should probably find the card with the lowest interest rate available. Forget about rewards.

5. Keep Some Credit Cards - some personal finance bloggers are dead set against credit cards. They maintain that there is no such thing as a good credit card. I disagree. At the very least, a credit card can serve as a last line of emergency access to capital, when more reasonable options are unavailable.

If you are looking for a new credit card, fair credit cards may be a good place to start your search:

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