Surviving a Credit Crunch

After the mortgage meltdown in mid-2007, lenders cracked down on home equity loans, causing consumers to turn credit cards as a lending source. Credit card debt and delinquencies rose. Credit card companies, feeling the brunt of delinquencies, began cracking down on credit, increasing interest rates and credit card fees, and decreasing credit limits.

What's a Credit Crunch?

A credit crunch is a period of time in which credit and loans are more difficult and costly to obtain.

There are individuals and companies who invest in debt. These investors make money when consumers pay back their credit card and loan balances. Investors don't make money when consumers don't pay back their debt.

When credit card and loan delinquencies rise, debt investments become unattrative, leading investors to pull their funding. As a result, banks become stricter with lending and consumers, especially those with credit problems, find it harder to get credit.

Here's what you can do to survive a credit crunch.

Keep Paying Your Credit Cards and Loans On Time.

Credit card companies have to make money to stay in business. When investors start pulling funding, credit card companies find ways to get more money from cardholders. Increased late fees and interest rates are one way of doing this. Because of universal default, your interest rate on a particular credit card could increase even if you're late on another credit card's payment.

According to Smart Money, banks could start sending accounts to collections sooner, if credit card delinquencies rise at a swift rate. 

Not only do timely payments save you money and keep you out of collections, it also keeps your credit score healthy. A good credit score indicates a trustworthy borrower - one that credit card companies aren't afraid to give credit to.

Keep Your Balances Low


Since credit card issuers are tightening credit, they may decrease your credit limit, leaving you at or above your limit. In ordinary times, your credit limit would only be lowered in response to some negative action on your part, like repeatedly going over your limit or missing credit card payments. In a credit crunch, credit card issuers will decrease your credit limit simply because of market conditions.

A lower credit limit can hurt your credit, making it seem like you've maxed out your credit cards, even though you may not have. Keeping a low balance will reduce the damage of a lowered credit limit. A zero balance will eliminate the damage all together.

Have An Emergency Fund

An emergency fund keeps you from having to resort to credit during an emergency. During a credit crunch, if you need credit and don't have it, you might have a card time getting it. If you already have a reserve of cash, you won't have to resort to credit at all. Ideally, you'd have an emergency fund anyway - credit crunch or not.

Take Steps To Improve Your Credit


Risky borrowers - those who are likely to become delinquent on their credit cards - are hurt most by a credit crunch. They pay higher finance charges and fees on their credit accounts. It's also harder for these consumers to get new credit.

Consumers can reduce the effects of a credit crunch by taking steps to improve their credit. Making timely payments on all bills, keeping credit card balances low, and limiting new applications for credit are all ways you can improve your credit.

Stay Smart With Your Credit Card Usage


Good credit goes a long way during a credit crunch. If you have good credit, keep it that way. Charge only what you can afford and pay your balance in full each month.

Be aware that creditors might decrease your credit limit, especially if they suspect you'll miss a payment. Pay attention to your credit card statements and other notices that come from your credit card companies to catch a lowered limit as soon as possible.

- Tampa Bay Auto Network
 
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