Meredith Whitney, one of the first financial analysts to accurately report on the credit crunch back in Oct 2007, wrote an interesting opinion piece for the WSJ. Ms. Whitney believes that Washington needs to act now to avoid another credit crunch. Six months earlier, she estimated that credit card companies will reduce credit card lines by $2 trillion by the end of 2010, and now she has revised her estimate to $2.7 trillion. Here are some of the main points in the article:

• Credit card lines play a crucial role in the American economy because credit card debt is revolving – that is, consumers pay off their credit cards and use their credit lines repeatedly over time.
• The decline in home prices has been a better determinant of consumer behavior than FICO scores. In the past, credit card lenders were too reliant on FICO scores and the bulk of credit lines were extended when unemployment averaged below 6%. Hence credit card companies are reducing their credit lines significantly in the current economic environment. As lenders reduce credit lines based on where a borrower lives, trustworthy customers are put in a more vulnerable position along with bad customers.
• When one credit lender cuts a credit line, the credit card owner is perceived to be riskier by other lenders. Consequently, the other lenders also become more likely to cut the available credit lines.
• Upcoming changes in the Unfair and Deceptive Acts or Practices regulations will restrict the ability of credit card companies to reprise risk (in other words, increase interest rates as they see fit) and, as a result, may cause a further decrease of credit available to consumers.

Ms. Whitney acknowledges that credit was overextended in the past 15 years but she is concerned that taking away credit from trustworthy borrowers will weaken consumer spending, and consequently, the economy significantly.

If you use your credit card while traveling abroad, your credit card company will often charge you a foreign currency transaction fee. This fee can be as high as 3% of the total amount of the purchase. Here is a quick summary of the fees charged by major credit card issuers:

• American Express – 2%
• Bank of America – 3%
• Capital One – 0%
• Citibank – 3%
• Discover – N/A (generally, not accepted globally)
• HSBC – 3%
• JP Morgan Chase – 3%
• US Bank – 3%
• Wells Fargo – 3%

In any case, monitor your credit card charges closely when you travel abroad. You will find that credit card companies use different methods to calculate your exchange rate. Before you leave on your trip, you should call your credit card company to inquire about their charges and fees abroad.

How many credit cards should you own? According to Suze Orman, you should own (or at least carry) only two credit cards: one for regular purchases and one for backup. She is particularly critical of department credit cards that lure consumers into getting a discount at the cash register which may end up costing more in interest fees. Suze warns, however, that you should close credit card accounts over time to avoid hurting your credit history.

Cash back credit cards offer cash-back rewards for the purchases you charge. Credit card companies will typically either send you a check at the end of the year or deduct the cash back you have earned from your credit card balance. Note that some credit cards require you to call in and inquire after your cash-back rebate, and will not send the money to you automatically.

The amount of cash back you receive will depend on the specific terms and conditions of your credit card. The typical cash back rate is approximately 1% of the total amount you spend. While some cash back credit cards offer a fixed percentage across all types of purchases, other cards offer different percentages based on the type of purchase you make. For example, a credit card may offer 5% cash back on grocery purchases and 0.5% on other purchases.

When you compare cash back credit cards, pay close attention to all of the terms of each card. As is the case for many other types of reward credit cards, cash back credit cards may have annual fees or higher interest rates than a credit card that doesn’t offer a reward program. Analyze your past spending to estimate how much cash back you can earn and whether a cash back credit card is really worth it for you. If you do not pay off you credit card balance in full every month, the higher APR will probably exceed the cash back that you have earned. Some credit cards may even limit the amount of cash back you can earn per year. And, consider choosing a credit card that will automatically send you your earned cash back at the end of the year.

Bank accounts do not affect your credit score and closing bank accounts will not hurt your credit.

Many credit card issuers offer credit cards with a regular APR lower than 12%. In order to qualify for a low APR credit card, you usually need to have excellent credit history (i.e. a great credit score). The higher your credit score, the more likely you are to get approved for a lower interest offer. Low APR credit cards are a good deal for consumers who carry a balance and seek to minimize their interest expense.

If you pay off your credit card balance in full every month, it may be worth it for you to have a credit card with no annual fees and a longer grace period. By paying your credit card in full, you will not incur interest on new purchases. Keep in mind that grace periods usually do not apply to paying cash advances and balance transfers.

If you carry a credit card balance from one month to another, low interest credit cards are the right choice for you. Credit card companies often offer 0% introductory APR on balance transfers and purchases for 6 or 12 months. In this case, your APR will change after the end of the introductory period. If you plan to transfer a balance, chose a card with a low APR and lower balance transfer fees.

But remember that credit card companies can and do change their interest rates from time to time. Many credit card interest rates are tied with the Prime Rate, the Treasury bill rate or another interest rate benchmark. When the corresponding rate changes, your regular APR will chage as well. If your credit card has a fixed rate APR, your credit card company will notify you before increasing your APR rate.

Many people fail to avoid credit card pitfalls. They overspend, accumulate large amounts of debt and eventually fall behind with their credit card payments. This is a brief guide on how to become a more responsible credit card user.

Consumer credit can cost you

This is especially true with credit cards. Credit cards are an unsecured form of credit that can often carry interest rates of over 10%. Whenever you use a credit card, you are borrowing money and you are obliged to repay back the amount you spent. Credit card issuers will require you to pay back the original amount you borrowed plus any interest, charges, and fees.

Before you borrow money, it is important to understand the cost of borrowing. Do the math! For example, if you charge $5,000 and your APR is 15%, you will be have to pay approximately $750 in interest a year. The longer it takes you to repay the loan, the higher the amount you end up paying back. In addition, if your monthly payments do not exceed your monthly purchases plus the interest charge, the amount you owe will grow over time. Try using an online calculator to calculate the cost of carrying a balance over time.

Run a balanced budget

The best way to build a solid financial foundation is to stay focused, organized, and make decisions based on your financial objectives. First, keep track of your monthly expenses. Keep all your pay stubs, bank statements, credit card statements, utility bills and purchase receipts. Second, define your goals. At the end of the month, add up all your monthly expenses and compare the total amount to your income. If your expenses exceeded your income, you may need to make some adjustments. Look for ways to increase your income or reduce your expenses. Finally, establish a savings account and determine a fixed amount of your paycheck that you can allocate to saving every month. If you carry a credit card balance, make a plan to pay it off over time!

Analyze your bank statements

Do not throw away your purchase receipts. You can create an excel spreadsheet on which to record all your receipts, to help keep them organized. At the end of the month, double-check all check, bank, and credit card charges. If you find errors or discrepancies, notify your bank immediately. Read all notices sent by your credit card company. Credit card companies have to notify you of any changes in your credit card terms. If this happens, contact your credit card company and ask for an explanation. If your APR is increased and you carry a balance, consider switching to a new credit card with a lower APR.

Do not use your credit card for cash advances

Cash advances are not a good deal for you. They tend to carry a much higher APR than your APR on purchases.

Schedule your monthly payment online

Avoid late payments. Paying your credit card late will hurt your credit score. Schedule a recurring payment online every month that will cover your minimum payment. This way, if you forget to pay your bill ontime, your credit card company will withdraw the money automatically from your bank account. If you use multiple credit cards and they have different payment due dates, you can call each company and ask them to move your billing cycle to end at the end of the month so you only have to remember one payment date.

Monitor your credit score periodically

Everyone is entitled to a free annual credit report. Use this to check your credit history for errors and discrepancies. Even if you do not plan to apply for a new loan, you want to make sure that your record is accurate and you are not a victim of identity theft. Checking your credit report will NOT result in a lower score.

Do not let others to use your credit

Be a responsible adult by not letting others abuse your credit history. Do not sign up as a cosigner on a loan unless you are prepared to face the possibility that the person my default on their loan.

Watch out for department store credit card promotions

Many of the credit cards offered in department stores carry a higher APR. If you opt to open an account with a department store to take advantage of a discount, do not use the credit card to carry a balance. And, of course, even moreso than with a regular card (with a lower APR), do not charge more than you can afford to pay off.

Pay attention when you receive a credit card offer

Understand all interest rates, fees and charges before signing up for a new credit card. The less annual fee, the better. Often, you will not know what your APR will be until after you are approved for the new credit card. If you do not like the APR you get, cancel the credit card before you use it.

Use only one credit card for purchases

If you have multiple credit cards, use only one credit card for purchases. Avoid accumulating a balance on more than one credit card. If you transfer a balance to a lower APR credit card, use only the new credit card and remove the old one from your wallet and online accounts.

If you have bad credit or no credit, you might not qualify for most credit card offers. In this case, you may need to consider using a prepaid credit card or a secured credit card as an alternative.

Secured credit cards were designed for people who need to repair their credit history or establish a credit history. Once you are approved, the secure credit card issuer requests a deposit which then becomes your credit limit – that is, you can only spend up to the total amount of your initial deposit, much like a bank account. When selecting a secured credit card, make sure that the card issuer reports to the major credit bureaus. Paying off your credit card balance on time will help you to improve your credit history.

Alternately, you could apply for a prepaid card. Prepaid credit cards can be used just as any other credit card and approval is guaranteed. Prepaid cards also require you to pre-deposit a balance. The disadvantage of prepaid credit cards is that they generally do not report your activity to credit bureaus, and thus you will not be able to improve (or diminish) your credit score.

It seems that the housing market was just the beginning of the bubble and all personal finance products will continue to get hit hard by the credit crisis. While the government pours hundreds of billions of dollars into the failing financial system, credit card issuers are aggressively closing inactive credit card accounts in a move to reduce their risk exposure. From the WSJ:

“Most major issuers, including Chase, Bank of America, American Express and Citibank have been slashing credit lines and closing the accounts of those who don’t spend on their card regularly. While these issuers are required to notify you in writing of an account closing, there’s no requirement that they do so in advance. Even when they do give early notice, the only way a cardholder can stop their account from getting shut down is to start spending again.”

The author correctly points out that this could adversely affect consumers’ credit scores across the board. When a credit card company closes an inactive account, the account owner’s ratio of debt to available credit falls. According to FICO, a consumer with a 720 credit score is likely to drop to somewhere in the 600s.

Charge cards are credit cards that require you to pay off your balance in full every month. Because charge card balances are not loans, charge cards do not carry an interest expense. There is, however, a late payment fee in case you fail to pay off you balance on time. American Express charge cards offer a membership rewards program including insurance benefits, hotel and travel rewards, and a loyalty program. Some charge cards may also allow you to pay off your balance over a longer period.

If you use a charge card without a limit as an alternative to using a credit card, you may see your credit score decline. This is because in place of a credit card’s limit, the credit bureau will often use the highest balance reached on your charge card to calculate your debt to available credit ratio. Thus, your used credit ratio may appear artificially high. Thirty percent of your Fico score, for example, is affected by the amount of money you owe.