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Credit Card Chaos From Banks You Bailed Out

I’ve been inundated with emails from readers who’ve had their credit cards closed, interest rates hiked on existing balances, lines of credit cut and minimum payments raised. Companies are racing to maximize revenue before the Credit Card Accountability Responsibility and Disclosure (CARD) Act goes into effect February 22, 2010.

More consumers fell behind on credit card payments in September as unemployment rose. Many of the job losses came from small businesses – which are being squeezed as banks cut back on small business loans to the tune of $8 billion between April and August.

Yes, those would be the same banks that took $700 billion in taxpayer dollars from the Troubled Asset Relief Program. Check out the Inspector General’s quarterly report released today, noting that “it’s extremely unlikely that the taxpayers will see a full return on their TARP investments.” Don’t expect the document to tell you exactly where the $700 billion went, since the Treasury didn’t require banks to report what they were doing with your money.

In any case, this week’s Yahoo!Finance column outlines strategies to manage the changes in the credit card industry. Here are a few more tips:

1) While it’s tempting just to shove your credit cards in a drawer and switch to cash, that’s not the best strategy for your credit score. “I’d caution consumers not completely shelve their cards, because a lot of companies have been closing down accounts because of inactivity,” says John Ulzheimer, president of consumer education for Credit.com, a card-comparison Web site. “Use it periodically to knock the dust off it and then pay it in full at the end of the month.”

2) Someone who charges everything to a card and pays it off in full in order to reap cash-back, miles or other rewards should monitor his utilization ratio closely (see the column for a how-to). If it’s well over 10 percent, it’s time to switch strategies. I recently did this, moving to a checking account that pays more than 4 percent interest for making multiple debit card transactions

3) It may be worthwhile to expand your available credit pool by opening one or two more credit cards, especially if you rely on just one. Space out those new-card applications by at least six months, because a sudden burst of activity on your credit report “can smack of desperation on the part of the applicant,” says Ben Woolsey, director of consumer research for CreditCards.com, a card-comparison Web site.

4) As I’ve been saying for years, never carry a balance from month to month on your credit card. Get a budgeting system that helps you live within your means. I use Mvelopes.com, where I freelance as a contributing editor. The system has a new Debt Pay Down feature that helps organize your pay-down in a fast, efficient way.

You list all your debts from highest interest rate to lowest and make sure you’re paying all the minimums. Any extra cash you can find is funneled to the highest-rate card. Then when the first debt is paid off, the money that went toward that card “rolls down” to the second card as an additional payment. When that’s paid off, the money that was going toward the first two cards rolls down to the third debt, and so on.

My favorite feature – called “What If” – allows users to instantly see the effect of an extra payment – how many years, and how much interest will be saved if you can toss another $100 or $200 toward the debt. In addition, the system allows users to automatically sweep any money left over from the spending envelopes directly to the debt pay down.

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