Black Friday is coming and so will be the temptation to pull out the credit card.  Here are some things you need to be aware of when shopping this Christmas.

Be aware of your new credit terms and conditions - Credit card companies have aggressively reduced credit limits and increased interest rates this year due to the new credit card legislation currently set to go into effect February 2010.  Most consumers resort to their credit cards as a way to “finance” Christmas.  Christmas is the one time of the year that consumers are the least prepared for financially. As a result of limited savings put back for Christmas spending, debt is increased.  During this particular year, this creates two problems.

The first area of concern is interest rates.  In response to the new credit card legislation that will go into effect February 2010, credit card companies have raised credit card rates as well as changed them to variable rates.  ANY new debt created in this environment could end up being extremely expensive.  The problem is that those variable rates are tied to a benchmark and that benchmark has nowhere to go but up.  As a result, the cost for holding debt for consumers should greatly increase over time.

The second area of concern has to do with reduced credit limits - In response to the new credit card legislation, credit card companies have sought to reduce their own risk by reducing consumer credit card limits.  As a result, credit scores can be affected.  One aspect of credit scoring is the credit utilization ratio.  This formula looks at total overall credit that has been issued to a consumer and the amount of that credit the consumer is utilizing.  As a consumer you want a credit utilization ratio lower than 30%.  For example take the consumer that has $10,000 in total credit limits.  If that consumer has $8,000 of debt on those credit limits, then the consumer is utilizing 80% of their credit limits.  For credit scoring purposes, you want that utilization to be lower than 30% or in this case below $3,000 of debt.

Let’s suppose that the credit limits in this case are lowered to $8,000.  If the consumer has $8,000 worth of debt on $8,000 worth of credit limits, then their credit utilization ratio is 100% which would have a much more negative effect on the credit score.

Finally, be careful opening up new lines of credit this season - In order to attract consumers and sales, retailers will offer deep discounts to those who apply for a credit card and use it to pay for their Christmas gifts.  With the new credit card legislation going into effect next year, consumers need to be careful when taking out new credit cards.  Although credit card companies are going to be forced to be clearer with their terms and conditions and not so abusive, they still are finding out new ways to abuse consumers through the use of other types of credit card fees.  It is crucial to read the terms and conditions before taking out a new credit card.