Three Credit Card Lessons from the Downgrade

In the past week, the stock market has had more than a few ups and downs. The Fed’s announcement last week that it would keep the federal funds rate near zero for two more years was an attempt to calm fears in the short term. Long term, though, I still think interest rates will climb so it’s important to use your credit cards wisely.

I actually think that Washington did a great job in the past few weeks of showing us what not to do if you want to manage your credit life properly. Here are a few lessons that we can apply to our own lives when it comes to using our credit cards.

Lesson #1: Don’t spend up to your credit card limit (and then ask to have it increased)

Okay, this one’s pretty obvious, but never has this concept been more clearly displayed than in the past two weeks. In Washington, they debated over whether it was a good move to increase the debt ceiling. In the end, there was little choice since not increasing the ceiling could lead to a downgrade. One of the ratings agencies, Standard & Poor’s, downgraded the U.S. anyway, citing that political brinksmanship had a lot to do with the downgrade.

Your credit card limit is like your own personal debt ceiling. If you max out your card and ask for a higher limit so you can keep spending, you’re spiraling into debt. It can also make your credit card issuer worry that you’re no longer a good risk. When issuers worry about you, they think about raising your interest rate.

Also, keep in mind that the more debt you carry on your cards, the lower your score will be. You’re utilization rate—the ratio of your balances to your credit card limits—should, optimally, be less than 10 percent to maximize this part of your FICO score.

If you find you can’t make it without using your cards, it might be time to seek help. Check out the National Foundation for Credit Counseling for counselors in your area.

Lesson #2: If you share credit card decisions with a significant other, make sure you communicate frequently

Washington showed us what a mess it is when you have to work closely with others who don’t share the same views. Philosophical differences and a lack of communication can lead not only to financial disaster, but also to calling each other names in public.

If you and your significant other have different viewpoints about how to use credit cards, have a calm, sit-down talk about it. Decide what types of expenses you want to put on credit cards. Also make sure you decide who’s paying the bill every month. Then touch base frequently to make sure you’re both still with the program.

Really, make these decisions ahead of time so you don’t end up fighting or in debt (or calling each other names in public).

[Resource: Tips to Improve and Rebuild Your Credit]

Lesson #3: Don’t spend more money than you bring in

In Washington, apparently not many folks were worried about how the debt would be repaid until it was a total crisis. For the rest of us, this is simple math. You don’t spend more money than you make. Period. You should always track your spending on your credit cards to make sure you’re staying within your budget. If you’re reluctant to do so, stop using your cards.

Now, bad stuff happens all the time. Your roof might start leaking. Your car might need new brakes. Times are tough so if you have an emergency, you might have no choice but to put it on a credit card.

One way to minimize the damage when you have to carry a balance, is to have a low interest credit card for this very purpose. You can also use the opportunity to open a new card with a zero percent introductory APR so you can pay off the debt over a year or so with no interest.

In other words, have a plan in place for those times when you do have to borrow money to pay for something. You’ll be way ahead of Washington.

[Featured Product: Looking for credit cards for fair credit?]

Image: Darin Marshall, via Flickr.com