Friday, January 2, 2009

Your financial lifelines...paper or plastic?

Worrying about no bailouts for the little guy is so 2008. Worry about givebacks instead.

New Year's forecasters talk a lot about credit clampdowns this year. What analyst Meredith Whitney and Oppenheimer & Co. gently describes as"expanded forced consumer deleveraging" could soon whack $2 trillion off our collective credit lines, she wrote recently.

That's obviously bad news for the owners of 221,000 retail stores forecast to close in the foreseeable future. But it's potentially just as tough on unknown numbers of cash-strapped households counting on emergency-use-only credit cards to help pull them through a job loss or some other calamity. Cautious lenders presumably will be shortening those lines too.

Lowering credit card limits hits borrowers two ways. First, emergency cushions suddenly become smaller than first planned. Second, if you do have to borrow, the reduction hurts your potential credit score too. If you borrow $5,000 on a card with a $10,000 limit, you are using half or less of your available credit, which helps your score. But if the lender cuts that $10,000 limit in half, suddenly you have borrowed to the hilt and are considered a poor risk, even though nothing else is changed.

One solution obviously is to save as much cash as possible for emergencies instead of counting on a credit card. But don't shun plastic entirely. There are occasions, such as having car trouble out of town, when having a card with a useable $2,000 or more credit line will be a lot more manageable than packing cash.

So watch your mail, open those credit card company letters even if you dread what you might see, and adjust your financial emergency kit accordingly

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