As the recession drags on and job losses mount, more consumers are facing financial crisis.
How they handle these challenges will affect how quickly they can rebound after the economy picks up steam, experts say.
"Don't just cross your fingers and stay awake all night. You have to handle it," said Carolyn Gorman, vice president of the Insurance Information Institute, a non-profit communications organization supported by the insurance industry.
Why is the institute interested in consumers preserving good credit scores? Because some insurance companies use your credit score - they call it your insurance score - to determine how much your premium is going to be.
Studies have shown a strong correlation between a consumer's credit rating and the likelihood that he'll file a claim, Gorman said. For example, if your car needs new brakes or tires and you can't afford them, you're more likely to have a wreck. That results in a claim on your auto policy.
Also, if your credit score falls, you'll pay more interest for all kinds of loans, including car and home loans, Chase spokeswoman Nancy Norris said.
"The lower the credit score, the bigger the risk" that the loan won't be paid back, she said.
Granted, it's tough to think about saving money in the future when you're not sure you can cover next month's cable bill, but taking care of business pays off, said Andy Veenstra, Wells Fargo's Fort Wayne president.
Like most advisers, Veenstra recommends putting money aside in an emergency fund. The ideal is enough to cover three to six months' worth of living expenses. But, he said, most people don't do it. And that's a real problem if they lose their jobs.
"Most people who don't have cash reserves set aside end up using credit" to pay living expenses, he said. But the banker believes that makes the situation worse, especially if you don't find another job right away.
"You have no source of income, and you're increasing your debt load" and minimum required monthly payments, he said.
Gorman, Norris and Veenstra offered the following tips for maintaining a good credit score:
•Pay your bills on time. Sometimes people have enough money to pay their bills but just don't do it on time, Veenstra said. He recommends online bill paying. Customers can schedule a payment to happen just once or every month on a specific date.
•Limit the number of credit cards you have. Limiting yourself to two is preferable. You could have as many as four if you keep the balances low, Gorman said.
•Meet with your banker or financial adviser. "During a recession, if you have a job or not, it's a good time to review your finances," Norris said.
•Check your credit report regularly for accuracy. If it includes mistakes, fix them, Gorman said.
•Pay off credit cards with higher interest rates first.
•If you think you're going to be late with a bill payment, call that creditor. "We don't want your car. We don't want your house. But we do want you to pay your bills," Norris said. Chase, which issues credit cards and makes various types of consumer loans, can modify payment terms for the short term or long term, she said. But interest keeps accruing on the entire balance. Loan modifications don't wipe out debt; they just keep you from being in default for not paying the minimum balance. Lenders don't modify payments, however, when someone simply runs up too much credit card debt, Norris said.
•Consider consolidating debt. You might be able to use a lower-interest home equity loan to pay off credit cards, your car or furniture loans, Veenstra said. As a bonus, home loans usually qualify for tax breaks.
•The more credit you're able to access, the more your score suffers. "Resist the temptation to open more credit cards to get a store discount," Gorman said. Her husband recently applied for a store credit card to save 10 percent on a purchase. Gorman was annoyed because, she said, those one-time savings can quickly be eaten up by future higher rates for insurance, credit cards and personal loans.
Liz Pulliam Weston, author of the newly updated "Your Credit Score: Your Money and What's at Stake," said even she didn't anticipate how important credit scores would become.
Lenders are steering clear of any type of risk, she said.
That means they are requiring even higher credit scores for people to qualify for the best rates and terms than before the recession and banking crisis. Now it takes a 740 or 760 score to receive the same benefits that used to be given to borrowers with a 700 or 720 score, she said.
"If you're in the 600s and below, all of a sudden you are in a world of hurt," Pulliam Weston said. "You're having more trouble getting financing. You're paying more for it when you get it."
The Associated Press contributed to this story.
