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Credit Wise How to Weather the Looming Financial Storm
A storm is
brewing on the financial horizon. Can you feel the electricity in the air? Can
you hear the thunder in the distance? Several major financial changes are
converging on consumers all at once and the impact will be a huge one. If
you’re lucky, you are prepared and won’t have to worry about how you will be
affected. If not and you have debt issues, you’d better brace yourself for
this one. Hopefully, with some preparation, you will be able to buckle down and
ride it out. More...
First, interest rates are going up. There has been a gradual increase in interest rates over the past year and the Fed says that it will continue. We have all been basking in the glow of low mortgage rates for the last several years. Homeownership is up. The mortgage industry is booming. Refinancing and home-equity loans have been occurring in mass amounts. Now rates are going up. For years, it has been an attractive option to refinance higher interest, non-tax-deductible debt, using a home-equity loan or second mortgage. Depending on the rate hike, this may soon change. Second, credit cards are increasing their minimum payments. Some could go as high as 4% of the balance. If you had difficulty just paying the minimum payment when it was just 2% of the balance, this can mean trouble for your budget. Double payments will be tough to manage for many families. This will help consumers in the long run but try telling that to someone who will no longer be able to afford groceries. If you have not seen your minimum payment increase yet, get ready. Most major credit cards will increase by the end of this year. Third, the government is making it tougher to file bankruptcy. The new law goes into effect October 17 that will force consumers who fall above their state’s median to prove that they need to wipe out their debts under Chapter 7. More consumers will be made to repay a portion of their debt through the court-ordered repayment plan, Chapter 13. While some say this is good for the economy, many are uncertain about how this will impact consumers. For sure, the new law means more work for attorneys so most will be raising their fees, too. Will people even be able to afford to file bankruptcy? Next, you may have noticed the price of a little something called gasoline. You know- the thing most of us need to get to work in order to bring home the money that will no longer be enough to cover our skyrocketing expenses. In what seemed like a brilliant move at the time, I bought an SUV a couple of years ago. Lately, I have been wondering how I would look driving a motorcycle. They have come down a bit since Katrina hit but it’s still a sad day when under $3.00 a gallon seems like a bargain. I am lucky to live in a state that is usually below the national average but it’s still rough. So you see, if you are in a situation where your credit card interest rates are increasing, minimum payments are rising, gas prices are off the charts, your income is staying the same, and now, bankruptcy may now be tougher and more expensive to file, you may feel battered from all sides. I am not a political writer and I am not going to attempt that now. I am not trying to scare you with all of this gloom and doom either so let me tell you some things that you can do to weather the storm. If you are concerned about the interest rate increase and you are planning to make a major purchase like a home or car in the next year, consider doing it now. The difference between a 5% loan and a 7% loan now can mean thousands of dollars on a 30 year mortgage. If the major purchase just has to wait, consider saving extra money now. When you are ready to buy, you can buy points on a mortgage that reduces your interest rate. Save now, buy some points and reap the benefits. Also, interest rates may vary widely from lender to lender. Traditionally, credit unions may offer a better rate on car loans. I usually shop around for the best rate, check with my credit union and then go into the car lot armed with the knowledge of the best rate around. If they can beat it, I let them. If not, I finance the car elsewhere. You may also notice the interest rates on your credit cards increasing. Credit card interest rates are based on a prime rate (set by the government) plus a certain number of points. So, when prime goes up, so does your annual percentage rate (APR) or the rate of interest you are charged on an annual basis. What can you do? Call your credit card company. If you are a good credit risk (pay your bills on-time) they may be willing to decrease your interest rate. Don’t threaten them. Don’t tell them you will file bankruptcy if they don’t reduce your rate. Be honest. Tell them that you are a good customer, would like to remain with their company and want a better rate. If they refuse, shop around for a lower fixed interest rate and consider transferring your balance. Now, we are moving on to credit card minimum payments. I have been at the National Foundation for Credit Counseling (NFCC) conference all week and have met with several major creditors such as Citibank, Chase, Bank of America, and Discover. They have all said that they will be increasing their minimum payments for their clients. The good news is that they will not be increasing payments for clients who are on a Debt Management Plan with a credit counseling agency. So, you can try to use some of the tips that I talked about last month in my column, Payment Panic, to manage the increased payments on your own. If you just can’t make it, credit counseling will be a viable option for you to keep your payments low while repaying your creditors in a reasonable amount of time and avoiding bankruptcy. Now, let’s address bankruptcy. The truth is that no one is exactly sure what impact the new bankruptcy law will have on consumers. Some say that it won’t affect many people. A small percentage will be forced to repay a portion of their debts instead of wiping them all out. If you think you may be heading for bankruptcy, consider all of your options before you file. If you do file and you are above your state’s median income, there will be a “means test” to determine which type of bankruptcy you are allowed to file. If you do have to repay a portion of your debts through Chapter 13, you will still be able to benefit from the bankruptcy protection laws in many areas. Start saving now for the attorney fees because they will be higher. In order to deal with the increasing gas prices, you can follow my lead and start pricing motorcycles. If not, start looking at places in your budget to cut back. Figure up how much more you will have to pay in gas based on current prices and see where you can reduce that amount in your budget. Ride with a friend. If you live in a city with public transportation, take the subway or bus. Buy a more fuel efficient vehicle. If nothing else, scope out the gas station with the lowest prices and fill up when prices drop. You'll also find more helpful tips from our editor here at BetterBudgeting.com, titled Saving Money on Gas! The bottom line is that our nation’s economy is tough to predict. For years, we have enjoyed low interest rates, low gas prices and low credit card payments. Now, all of that is changing. It can feel like everyone is ganging up on you and that your life is out of control. The truth is that if you plan ahead, there are things that you can do to prepare. The worst thing that you can do is to bury your head in the sand and wait for the changes to take place. There has never been a better time to assess the storm, determine how it will affect your life and take control to minimize the damage. Sunny days will come again.
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Copyright © 2005 by Jennifer Delcamp. All rights reserved. Want more money-saving tips? Get a FREE Subscription to our monthly newsletter!
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