BEHOLD - 2011'S CREDIT CRYSTAL BALL

Will the holiday "ka-ching" put you in the red for the New Year?

(Long Island, N.Y.) Oh no, this is not, I repeat, not one of those wrist-slapping "thou shall not max out your credit cards" warnings. Because the truth is many of us are relying on plastic to make the holiday season holly and jolly. What it is - a wakeup call. And boy do I need to walk my talk. I trotted through the malls in the wee hours of the morning on Black Friday, and well, pretty much haven't stopped since. Nor did it begin there, either, I must confess. I started stashing the holiday loot in October.

Once the credit card statements started to roll in, it's a rather eye-opening experience--even though I scaled back from last year. Judging by the long lines at the stores, I know I'm not the only one who is swiping the AMEX. While I hate to be a 'Debby Downer'... it's time to face some facts.

According to a recent statistical release by the Federal Reserve, consumer credit increased at an annual rate of 1-3/4 percent in October 2010, revolving credit decreased at an annual rate of 8-1/2 percent, and non-revolving credit increased at an annual rate of 6-3/4 percent. You don't have to be a finance expert to know that's not a good sign.

So what does 2011 have in store for us? Well, it's not all bad news! Ken Lin, CEO of CreditKarma.com, recently released his top five insights and predictions.

Prediction 1: Credit scores will increase

Credit scores have remained relatively stable during the past year, dropping four points since January 2010. However, Lin predicts credit scores will increase gradually during the coming year.

Prediction 2: As credit requirements loosen, more people will have access to credit

During Q2 2010, the Federal Reserve found that for the first time since 2007, banks are loosening credit card lending standards. In fact, the average credit score for consumers to acquire a credit card dropped 12 points during the first half of 2010, according to CreditKarma.com.

As a result of loosened standards, more than 6 million consumers are now able to obtain a credit card. Banks are also increasing their card offers to consumers, with Synovate's Mail Monitor reporting U.S. homes received 25% more credit card offer mailings in the third quarter from the second quarter of 2010.

Prediction 3: Interest rates will gradually rise

In 2010, lenders were eager for consumers to open new credit card accounts, loosening their credit requirements and enticing consumers through "hot deals" such as low or zero annual percentage rates (APR). However, as more consumers can obtain a credit card with a lower credit score, CreditKarma.com predicts lenders in 2011 will protect themselves by gradually raising interest rates.

"Consumers can educate themselves in advance on lenders' methods for raising APR so they aren't caught off-guard as interest rates start to rise in 2011," says Lin. "For example, the Credit CARD Act of 2009 requires 45 days' advance warning from banks of any APR increases. In addition, consumers with a zero percent introductory APR rate should note the rate often has an expiration date. The new financial legislation regulates that credit card companies must honor these offers for a six month minimum, so credit card holders should check at that time to be sure the special rate still applies."

Prediction 4: The average amount of debt per consumer will remain flat, but more consumers will start to use credit again

During 2010, consumers with a credit card had on average $7,745 in credit card debt, according to CreditKarma.com. In addition, credit card debt dropped 8% during the course of the year. At the same time, TransUnion reported that more than 6 million people have given up the plastic and turned to cash.

In 2011, CreditKarma.com expects the credit card debt per person to remain near the 2010 average. More people, however, will start to use credit cards again.

"Many consumers have been financially responsible over the past two years and delayed purchases unless they could pay the entire bill with cash," says Lin. "In 2011, expect consumers to feel comfortable using credit cards again, but don't expect consumers to rack up more debt than they feel comfortable they can pay off."

Prediction 5: Lenders will continue to be more "creative" when accessing a consumer's potential credit risk

Both FICO and VantageScore are already updating their credit score formulas to assist lenders in determining which borrowers are most likely to strategically default based on their past behavior patterns.

"Lenders will start looking at other factors to judge a consumer's credit worthiness. Already there is talk of issuers and lenders researching other aspects of people's financial records such as their income, banking habits, outstanding debt and the value of their home. You're going to see more and more of this during the upcoming year. Lenders want a holistic picture of a consumer's financial health before lending credit to those consumers," says Lin.

Janene Mascarella

December 14, 2010 12:11 PM Eastern

E-mail This Page | Follow Us | My Review Policy | Return to My Column

You can Bookmark & Share this article by clicking here: