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Sunday, December 28, 2008

Tightening the Money Belt


Spending Squeeze

Money is tight. That could spoil plans for a new home, car, vacation and more – unless you take action.

By Lori Johnston
The persistent credit crunch is impacting the way of life that Ericka Basile – and the millionaire readers of Naples Dog Magazine, which she publishes – used to take for granted. Recently the Florida entrepreneur was astounded to discover $257 in fees on one of her credit cards – just the latest surge in rising debt that's finally catching up with Basile and millions of consumers like her. "I'm trying to figure out, How do I get out from underneath this? It's a weight on my shoulders," says Basile, whose annual salary averages $159,000.
As the headlines remind us daily, the free-spending money train has left the tracks. Prices are up, but the ample assets we had to cover ourselves during good times are disappearing. Home equity has dipped to its lowest level in more than 60 years, and abysmal savings rates have left dwindling cash reserves. And credit? The creditors that were once all too willing to hand out cash now don't have it, or have turned off the spigot for fear of escalating losses. In short, we're learning again (if we ever knew how) to pay as we go. Even among women who have a good hold on their finances, the new tight -money environment can create a sense of panic – and require a new approach to money, says CPA Belinda Fuchs, president and founder of Own Your Money, a Boston-based financial coaching firm.
"Options are more limited now," she says. "The credit card companies and banks have taken quite a hit with everything happening in our economy. They're recognizing they can't be doing what they were doing before because they're going to get the same results. One of the things they're doing is making it harder to take out credit."
For big purchases, lenders are requiring more paperwork, higher down payments and higher credit scores for the best rates. Credit card lenders are taking a much harder look at new lines of credit, and they're more reluctant to cut existing customers some slack. "The products that are offered are much more scrutinized right now," says Jayne Malinowski, a vice president with Fifth Third Bank. "It's severely tightened."
Basile was denied a lower rate by one card company but is hesitant to consolidate her debt because of concerns about how it could affect her credit rating. Her best option now, she says, is to take control of her spending, which includes doing away with plans for a vacation with her two kids.
The most conspicuously absent safety net for consumers is still home equity – the one-time cash machine that's as anemic today as it was six months ago. "People were using that money as a financing source for many different things, such as maybe starting a business or funding education for children," says Faith Read Xenos, CFP, co-founder of Singer Xenos, a boutique wealth management firm. "They thought they had it available, and now they don't."
Alyssa Gilmore, 36, a senior marketing professional for a Boston-area financial technology company, was banking on her home as the capital behind plans to relocate her family to a better school district this year. But now those plans are on hold. A few years ago, she and her husband would've had much more equity in their home and could've sold it at again. "With the shrinking margins of home affordability, and with the tightening restrictions on loans, the chances of our being able to buy a place in a great school district, or sell our current home, in the next several years is probably slim," Gilmore says.
Easing the Squeeze
Overall, professional women may not be feeling the crunch as much because they typically have more cash reserves and are ideal borrowers, says Shiva Sattar, a Wachovia wealth management regional director. But it would be a mistake to feel immune to the crisis and allow it to catch you by surprise. Advisers relate cautionary tales of some clients – suddenly cash poor with no lending available – who have had to ask parents for inheritances in advance.
"It's really important that people look now" for lending they might need in the near future, Malinowski says, whether it be for a new car, a tuition payment or anticipated medical expenses. "Don't wait until you need the money. If you need the money, you're not going to qualify for it."

For those who are already taking a hit, financial advisers suggest a few basic steps that can help control ballooning payments and protect your future credit options.
First, make sure expenses don't exceed income.
Sounds obvious, but earlier this year the U.S. personal savings rate went negative, meaning we paid out more than we took in. That may work for the federal government, but it's not sustainable for the rest of us. Gilmore, for one, says she's trying very hard to save more, diverting cash into risk-free CDs and interest-bearing money market accounts. "We are in a time where money may be tighter and wages may stagnate," she says. "Opportunities to earn more money might shut down."

Second, enact a strategy to stay in financial shape.
If necessary, talk to your lender and ask for help with a debt management plan, says Jessica Cecere, president of the nonprofit Consumer Credit Counseling Service in Florida. And avoid raiding your future to pay for your present. So-called hardship withdrawals from 401(k) plans are on the rise as a way to make mortgage payments or raise quick cash. But if you don't return the money within 120 days, Xenos says, it's a taxable distribution, and you could lose 40 percent of the funds to taxes and penalties.

Third, keep an eye on your credit report.
As minimum scores for loan approval and the best rates increase, women can take steps to improve their credit scores. Malinowski advises directing any extra money toward minimizing debt loads. Paying credit cards down to 50 percent of the line amount can make a dramatic impact on a credit score, she says. And when the debt is paid off, dump most of your cards, keeping just a couple. Sattar adds: "Do you really need a card for Macy's, Nordstrom, Dillard's and other stores?"

While an overnight fix to your credit rating isn't possible, a little prudence and discipline will pay off in the future. "Over time," Cecere says, "if you're good, the good behavior outweighs the bad."

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