Real Rules For Managing Credit In An Economic Meltdown: How To Prevent Foreclosure & Bankruptcy

Trying to save your home or business in this economic nightmare? You are not alone. The collapse of consumer credit, business banking and the employment market have manufactured a perfect storm, and surviving it means understanding a new set of rules.

What Happened to the Economy?

Just a couple of years ago, many of us started our mornings with a trip to Starbucks for a five dollar cup of coffee and a bagel. Now we make our own coffee and drink it while checking Craigslist for jobs.  Most of us have heard far too much about the subprime banking crisis and bank bailouts. What we haven't heard about are the facts that most effect us.  So here they are:

We are in a period of broad "price deflation". That means prices for everything are falling.  When prices fall, businesses cut back on the number of folks they employ, and the folks they fire buy even less. Fewer buyers leads to more price deflation.  This kind of "deflationary spiral" destroys economies.

What started this collapse? What keeps fueling it? We hear far too much about the mortgage crisis and far too little about the credit crisis.  If you think back to the last really big purchase you made, whether it was a home or car or a piece of business machinery, the price you could afford to pay for that item was determined by how much you had in cash and how much you could get in credit.  Since banks are cutting back business loans, slashing home-backed credit lines and reducing credit card limits, people have almost no credit to use to make purchases.  The price of stuff must, therefore, fall.  And that means fewer jobs and falling wages as folks complete for the jobs that remain.

Until the credit crunch is alleviated, there will be no end to the recession.  When the credit crunch is alleviated, you can expect to see a huge jump in prices.

What Does All This Mean to You?

It means you have to forget a lot of the advice you've internalized over several decades. Because those rules were written when the economy wasn't deflating.

Do not pay off your credit card bills.  Cash is King.  Unless you are very, very sure that you will be able to make your mortgage or rent payments, keep your money in your bank account.  This is a very good time to make minimum payments on your credit cards. It is not a good time to pay them off.  If you pay them off, chances are better than even you'll have your credit limits reduced. That means you will have even less access to cash than you had before and your credit rating will not be at all improved.

If paying your credit card bills begins to jeopardize your ability to pay your mortgage, your rent or your health insurance premiums.  Stop paying credit card bills.  Seek professional "credit counseling" in order to get the amounts reduced to an amount you can pay. You must have a roof over your head and you must have health insurance because being ill in this economy without insurance could mean you don't get adequate treatment. This may change if Obama's national health insurance plan goes forward. But for the time being, consider health insurance as important as food. Remember that unsecured credit is unsecured for a reason. In the vast majority of cases you can keep your home even if you don't pay your credit cards.

Cut your costs.  If you have a house, this might be a great time to rent a room. If you have things you don't need, sell them.  This recession could last several years and unemployment is projected to enter double digits across the US.

If you are having difficulty paying your mortgage, look into loan modification or loan renegotiation.  You want to keep your property because you want to keep a roof over your head and you want to hold onto the asset that is most likely to rebound when the economy turns around.

If possible, do maintain payments on your credit cards. History indicates that after this period of deflation is over, hyperinflation will follow. When things do get better, you will be able to pay loans off more easily and "good credit" will be a very rare thing.

Where Can You Learn More?

Sadly, the best way to predict the course of this world wide recession is to study the Great Depression and the collapse of the Japanese economy a decade ago.  It may even make sense to study Austrian inflation.

What you must not do is hitch your future to trite phrases like "buy and hold" or "pay off your credit cards".  The folks who did best in the Great Depression were the folks who held on to real assets like property and equipment, not ephemeral things like "good credit" or "valuable stocks".