How to Reduce Credit Risk

Having numerous credit cards and credit lines can tempt you to overspend. Instead of saving cash for emergencies, you may find yourself relying on your credit lines as a safety net. Sure, it makes sense to use credit in a financial emergency, but relying too heavily on credit--coupled with illness or an unexpected job loss--can lead to severe debt or even bankruptcy. Carefully monitoring how you use credit can help you avoid that scenario.

Instructions

1

Gather your billing statements or call your creditors to determine how much available credit you have.

2

Calculate the total to determine how much money you could spend if you maxed out your credit cards. Depending on your situation, the total could be $5,000, $100,000 or some other number.

3

Conduct a purely subjective exercise by asking yourself how much debt you would be able to handle if say, your household income was cut by half because of a job loss or illness. Use this exercise to determine how much you should cut your available credit. For example, you may arbitrarily choose to reduce your credit exposure by 50 percent or more to guard against incurring more debt than you could pay on a reduced income.

4

Call your creditors to ask that your credit lines be reduced. Simply tell the representatives that you want to reduce your exposure to excessive debt.

5

Store a majority of your credit cards in a bank safety deposit box. Put your home equity line of credit checks and debt card in the box, too, along with with checks or debit cards tied to other forms of credit. Keep just one or two cards in your wallet. The idea is to make most of your credit accessible only in a true emergency, ending the temptation to indulge in impulsive spending on unneeded items.