New Way to Deal with Credit Card Debt

As the recession continues and companies cut costs, the consequences for actors are acutely felt: fewer productions, fewer auditions, and fewer bucks coming in. And it's not just acting jobs. More than a few of my friends have seen their day jobs dry up or their hours cut. Yet many of us still have credit card debt to pay off. The conventional wisdom about dealing with it, however, has shifted. Here are a few new recession-era rules to help you keep more money in your pocket just when you need it most.

Pre-recession rules recommended calling your credit card company and asking for a lower interest rate, as an APR even a few points lower could save you a bundle in the long run. And before the credit industry began to falter, the companies were often willing to negotiate. According to a 2006 survey by Synergistics Research Corp., about 78 percent of people who requested a lower rate got it. But now financial experts are rethinking this strategy. Why? Because your request may lead to a review of your credit file, and if your credit history is anything less than pristine, you could end up with a higher interest rate. So the new conventional wisdom is to request a rate reduction only if you're confident there are no red flags in your file, such as a history of late payments. And what you say can make all the difference. If you recently got a new job or a raise, mention it, advises But avoid telling the credit card company that you're having financial trouble or you're out of work, as it's likely to prompt scrutiny of your account.

How important is paying your credit card bill on time, even if it's just the minimum payment? It's a big deal. Your payment history accounts for about 35 percent of your credit score. This includes collections, bankruptcies, judgments, and tax liens. And if you're having trouble making the minimum payment, the sooner you speak to your creditor, the better your odds of working out a resolution. If you wait until you're already late, the company will be less willing to negotiate.

Once upon a time, there wasn't a financial-planning pundit who didn't say that paying off your credit cards should be your first priority. After that, they recommended having a safety net of savings to cover your living expenses for at least six to eight months. Clearly these people never worked with actors, as I've rarely met an actor who had the funds or the foresight to do this. (Hell, I've rarely met anyone in any occupation who does this.) But now the strategy has done a 180. Financial planning guru Suzie Orman recently reversed her longtime position on the issue, declaring on her website, "The single most important action to take in this severe recession is to build savings, so you and your family will be able to have money to cover your basic necessities if you lose your job."

She suggests that rather than pay off credit card debt, you make only the minimum payments and focus on building an emergency cash fund instead. The switch is a result of the harsh measures now being taken by credit card companies, such as reducing credit limits, raising interest rates, and "rewarding" our patronage by closing our accounts after our balances are paid. If you use all your extra money to pay down your credit card debt but then they close your account, what will you do if you lose your job? Try getting credit when you're unemployed; it's a near impossibility. Orman's new advice is for people who don't have a significant emergency savings fund—and that would describe many actors perfectly.