People have a b’zillion questions about credit and how it works. And just when I think I’ve covered everything, I get another great question that makes me realize why people are so buggered up about credit: It’s really complicated man! Jeez! So here are some recent questions and answers from which you may learn and thing or two.

Kerrie wrote:

I recently noticed that the credit limit on one of my credit cards had been increased by a lot – far more than I would ever need or want to put on a credit card. I always pay the balance on this and my other cards in full. I plan to call the company to have this limit lowered to something more reasonable. I wanted to check first though – does lowering my credit limit have any negative impact on my credit score? Common sense tells me it should improve my credit score, but I wanted to check with you.

Kerrie, lowering your credit limit won’t affect your credit score if you pay off the balance on your credit card every month. The only time a lower credit limit has an impact on your score is if you’re carrying a balance and you get close to the limit. Some people say you shouldn’t use more than 60% of your limit to stay on the good side of the credit score system. Since you always pay your balance – smart girl – you should lower your limit for two reasons:

• You’ll feel more comfortable, and
• You’ll reduce your “available credit,” which is something lenders take into account when they decide whether or not to give you a loan.

J wrote:

I have very good credit (I know that because I just double checked my credit score). However my daughter – who isn’t quite 20 yet – has needed to get a consolidation loan which I had to co-sign. So far she’s made all the payments but how much am I at risk for my credit being damaged? The bank wasn’t all that straight forward on this one.

J: You’re on the   hook for the whole amount outstanding, but your credit history won’t come into the picture unless your daughter defaults and they come to you for payment. If you pay off the debt in full, your credit won’t take the hit. If you can’t and payments are missed then your credit score will go down. You should also keep in mind that lenders consider the co-signed loan as part of your debt obligation so it could affect your ability to borrow for your own purposes.

Y wrote:

Hi Gail! As a couple with jobs in middle management, making a respectable earning (household gross income of $130k), I am hoping you can help us. We are well aware of the mistakes we have made, student loans, consolidation loans, bad car leases and high consumer debt. Lessons learned, and we want to move forward with our best foot, but is it possible that it is just too late!? Despite our difficulties with money, we have gone ahead and bought a house (our mortgage is always paid), and continued with “life” in that we have 2 children (neither involved saving before my maternity leave which does not include any kind of company top up). I am currently on maternity leave and will be returning to work asap to avoid digging a deeper hole. In the meantime, the bills continue and there doesn’t seem to be any reprieve. At what point is filing for bankruptcy the better answer, and can 1 person out of a married couple file for bankruptcy without a detrimental affect on their partner?

Y, one partner can file for bankruptcy without affecting the other as long as the other is not also signed on the loan documentation. So if your husband has a card in his name, and you are in no way signed on that card, if he declares bankruptcy it will not affect you at all. As for it being too late, it is never too late. You may not like living through the next few years because you’re going to be living on a shoe-string. But you can make your life better with grit and determination. Go and read this blog about becoming debt free. If when you figure out your monthly repayment amount it is in no way do-able because you just can’t find the money anywhere, then bankruptcy may be the next option.

V wrote:

I recently got my [Life Planner] in the mail and have been getting all the info. I need to complete the budget worksheets. I’m going to get the jars started this month. Our debt has been causing me sleep loss. My husband and I have accumulated over $84,0000 in debt. It has grown to that from over spending, student loans, poor financial decisions and never living on a budget. Our debt is all consolidated into the Scotialine Visa (current interest rate of 3.5%). It’s humbling every month to open the Visa statement and see that number…$84,000 (Wow!). Our mortgage is up for renewal in 2010. We bought our house 5 yrs ago and our mortgage is currently around $250,000 (4.5% interest). I would like to roll some, if not all of our debt into the mortgage when we renew. Is this advisable?

V, how did you ever qualify to have $84,000 on a credit card? That’s just ludicrous. You don’t say how much equity you have in your home, but if it’s just five years old (with the recent downturn in the market) you may not have enough to cover the debt. And since your credit card interest rate is lower than your mortgage rate, that means you’ll be paying more in interest. AND once it is rolled to  your mortgage, it can’t be discharged through a bankruptcy in the same way it can as a cc. So my answer would be to do more homework, visit a bankruptcy trustee to see what alternatives you may have, and cut up the fricken’ card!

H wrote:

Hi Gail! I read your section about student debt and it was really helpful. In 2010, at the end of my 5 years at school, I expect to be about $26000 in debt. The National Student Loan Service Centre has a really helpful loan calculator to determine monthly payments, and my question is – should I go with a floating or fixed interest rate? And, if I choose one over the other, is there any way to ’switch’? The calculator estimates that the floating interest rate will result in lower interest payments, but I know it carries more risk. Also, the Ontario student loan has an eight month grace period until payments begin; I usually have leftover OSAP at the end of the school year and want to use that, plus as much as I earn in the 8 months after, to ‘throw’ on to my principle in lump sums before I start making payments – is that a good idea? Thanks!

H, you ask great questions. When you choose a variable rate, you pay a far lower interest rate, but it means you have to keep your eye on interest rates because if they rise, more of your money will go to interest. I believe the spread right now between fixed and variable n student loans is about 5 points, which means rates would have to rise SIGNIFICANTLY to make the fixed-rate loan more attractive. If you’re planning to get that debt paid of PDQ, I’d go variable. I don’t know if you can switch. I expect you can go from variable to fixed, but as variable rises, so would fixed. You would be wise to use your left-over OSAP and anything you earn to knock a whack off your debt. It is soooo gooood to hear from a sensible girl.

Sandi wrote:

I recently received an offer from a credit card company for a balance transfer, with a much lower interest rate than I am currently paying on my credit card. I called Visa and asked them to lower my rate to match the rate of the new card and I was told that it culdn’t be done, that the interest rate I have on my card is a “standard interest rate” and cannot be lowered. She also told me I couldn’t speak to a suprevisor because it wouldn’t do me any good. Where do I go from here?

Sandi, why would you want to deal with a company that is so uncooperative. You can’t speak with a supervisor? Really? First, I would call the company back and ask to speak with the vice-president of the department since you think (s)he should know how employees are representing the company to clients. You are, after all, a CLIENT.  Let’s see if that gets you anywhere. If not, then I’d accept the offer from the other credit card company to do the balance transfer, assuming there are no hidden fees or “tricks” up their sleeves. So read the paperwork carefully. Do not cancel the old card. Just stop using it. You want that credit history to remain intact until you’ve built up a history on the new card. I would tell the credit card company who has not treated you well that you will be telling everyone you know the story. Finally, get that debt paid off. You should be doing everything you can to pay off all your consumer debt as fast as possible. Times they are a’changing, and being debt-free will be your ace in the hole.

On a final note and from personal experience, when you cancel a credit card, that does not mean that all the charges to that card automatically stop. Much to my surprise, I cancelled my HBC card, which I only used for online transactions and like to change periodically for security reasons, only to find that the transaction for my daughter’s facial product went through on the cancelled card. Hmmm. Good thing I hadn’t set up the auto-ship plan on the new card just yet! If you want a card to actually be cancelled, it appears you must report that card lost or stolen to ensure no further charges go through. 

I did CBC radio yesterday because everybody was talking about the “good news.” The central banks around the world are cutting interest rates. But all the hand clapping and “yipees” may be pre-mature. I’m not sure that Matt Gallloway, or the listeners, wanted to hear my very pessimistic take on the mess we’re in. But it’s a MESS we’re in. That anyone would think a .5% cut in the Bank of Canada’s rate would fix it is another example of how we don’t understand money and how it works.

One of the biggest mistakes people make when it comes to credit is that they simply don’t know the rules. It’s kind of like the way some people feel about their cars; as long as it runs, they don’t care how it works. Hey, I’m one of those people when it comes to cars, but I’ve at least been sensible enough to find out what the rules are to keep the sucker running, and follow them. Not so with most people and their credit. They don’t know the rules and one of the rules that’s about to bite a lot of people in the butt is this:

Credit card debt and unsecured lines of credit are “callable debt.” Yup. That means that at any time the lender can say, “Give me my money,” and borrowers have to cough it up.

No way, Gail. That can’t be true. Every time I tell people that credit card debt is callable and the lenders can ask for their money back at any time, this is their response.

Heads up folks, it’s a fact and American’s are learning just how it works.

Of the 20% of American Express clients who saw their limits reviewed as a part of normal operating procedure, FIFTY PERCENT saw their limits go DOWN. That means that to maintain a healthy credit ratio (remember, no more than 60% of you limit should be used) a lot of people are going to have to find the money somewhere, or reconcile themselves to watching their scores plunge. Someone with a $2,500 balance on a card with a $5,000 limit is using 50% of their credit line. But if that limit drops to $2,500, they’re now using 100% of their available credit, which is the biggest of no-nos.

In the U.S., a recent Consumer Action survey found that 75% of the banks questioned said they lower credit limits as a way to manage risk to protect consumers. Yah! Sure! Where was all that “protecting consumers” when they were throwing credit at people and upping limits at a wicked clip. Nope, they’re not protecting us. They’re lowering limits because money is drying up and they are scared. We should be wary too.

• Lower credit scores mean the cost of borrowing goes up.
• Lower credit limits means that consumers can’t just turn to their credit when they want to.

While many experts are suggesting you shop around for more attractive credit, I’m not sure how successful you’ll be in this lending climate. If your own lender wants to nail your shoes to the floor, why would some lender that doesn’t know you from Jack want to give you a better offer when the stakes are so high? Nope. Here’s what you should do:

Significantly lower the balance owned on your credit card. Hey, I’ve always been of the opinion that your balance should be zero after every monthly payment, but if you’re carrying a balance anywhere above or close to the 60% line, get to work paying that sucker off. The higher your balance, the more likely you are to fall under the lender’s microscope and find yourself with a lower limit.

Keep your eyes on the mail. If you’re like me and routinely dump what you think are dumb marketing letters, stop. Start opening and reading everything to make sure you know if this happens to you. Go over your monthly statement, including the credit limit box, and watch for interest rate spikes and new penalties.

Check your credit report. If you haven’t looked at your credit report in the last six months, now’s the time to do it. Be assured that your lender(s) will be. Even a small slip could have lenders looking closely at your potential risk of default and covering their asses with a lower limit, a higher interest rate, or both.

While I don’t believe we should be panicking — who makes a good decision when they’re panicking — I do believe we have to get our heads out of the clouds and start taking this mess seriously. I doubt you’ll hear a lot from me in the media because my message is simple and clear: get your debt paid off any way you can; this is no time to be spending money on crap! Not exactly the message the banks, the retailers, the advertisers want to hear, right?

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