Manage your credit cards wisely

You've probably heard - for years - that you need to carefully manage your credit cards and all similar lines of credit. A recession or down economy brings with it the need for even better credit card management. There a number of reasons you need to be wiser, but there is one overriding factor to consider.

First, understand that the entire global business community is negatively affected by a recession. Depending on the magnitude of the down economy, many companies must take some drastic actions, including laying off valued employees and engaging in serious downsizing activities. Most often, you have little or no control over your future career security, at least for the duration of the recession.

These potential results usually dictate that you maintain tighter control over your personal budget. You might first reduce "discretionary" spending – retail purchases, luxuries,dining out, vacations, etc. – to conserve cash for necessities, like rent or mortgage payments, auto loan payments, education and tuition needs, and emergencies.

With lower available disposable income, through your careful planning or downsizing that affects you, your credit cards are often the first source of concern. Even as a last concern, credit card use or problems need to be addressed and managed.

Placing yourself in "economic survival" mode does not involve ignoring or disregarding your credit card balances or other unsecured loans. Just because these lenders don't have any of your assets pledged as security, you need to manage both balances and monthly payments even more diligently than before.

To further complicate the situation, you must be aware that credit card companies can change your terms, including interest rates, credit limits, fees, and payment rules, at will. Credit card lenders can even reduce your spending limit to zero, regardless of your outstanding payment record.

It may seem unfair, but most credit card agreements, like those you signed when you opened these accounts, give lenders the right to change most terms of your accounts as they see fit. Your options are to a) accept these changed terms, or b) close your account.

Tips for managing credit cards in a down economy

Maintain your credit score

Keep your credit score high and improve it if you can. While it may appear to be a goal made more difficult by a recession, this is the single most important thing you can do.

Understand the heavy pressure on all lenders to restrict credit, minimize projected losses, and increase revenue. Their situation is actually eerily similar to yours. Reduced income, potential for significant losses, and few good prospects for increased income opportunities in the near future are issues that both you and your credit card company face during a down economy.

For example, a credit score around 700 formerly ranked you in the excellent category by most creditors, including credit card, mortgage, and auto lenders. While specific credit scores needed for approval and other lending policies are seldom made public by lenders, respected sources believe you might now need a minimum credit score of around 730 to be approved at the best terms.

Find a better deal

Analyze your current credit card terms to learn if a better deal is available. You might qualify for a balance transfer to a credit card with a lower rate. Some credit cards offer balance transfers at zero percent interest for some period, often from 90 days up to one year.

If your credit card company has increased your rates and fees or lowered your credit limit, search around for other cards with better terms.

Watch those balances

Consider keeping your outstanding balances around 30% of your credit limit, even less if possible. While it is at first annoying to have a credit card company reduce your spending limit, there is actually a more serious potential problem.

For example, you have a credit card with a $5,000 credit limit and a $2,000 average balance. Therefore, you are properly managing this card by maintaining your spending around only 40% of your credit limit.

But, your credit card company notifies you that they are lowering your credit limit to $3,000. Now your $2,000 balance represents 67% of your spending limit. Guess what happens next. Your credit score goes down! Your debt-to-credit ratio increased with a stroke of your credit card company's pen.

Find ways to prosper

These are but a few important wise moves you can make in 2009 and future economic downturns to better manage your credit cards. By keeping your credit score high, your average balances low compared to your spending limits, and moving your balances to accounts with better terms, you may even prosper during a recession.

See also: Credit card FAQs