Credit Cards, Mortgages, and Refinancing: What to Do With Your Money for 2010

Mortgage rates are at historic lows — 5.07 percent for a 30-year fixed — and home buyers will be able to snag a special tax credit until July. So early 2010 will be a prime time to refinance your mortgage or apply for a new home loan. But credit card issuers will continue turning the screws on customers in 2010, raising rates and hiking or inventing fees. Because the credit card law taking effect in February will restrict lenders from punishing riskier customers, many good-citizen cardholders will be told to pay more.

The nine best strategies for borrowing in 2010:

1. Refinance your mortgage

Low mortgage rates will make refinancing tempting as the year begins, especially if you have an adjustable-rate mortgage resetting in 2010 or 2011. Many mortgage analysts think rates are as low as they’ll ever be. So the longer you wait, the more you risk the low-interest window shutting. Just remember the advice of MoneyWatch Editor-at-Large Jill Schlesinger: Don’t refinance if you don’t expect to stay in the home long enough to recoup the closing costs. Skittish lenders will be quick to reject applicants who seem too risky, so be sure you have what it takes to get approved for a refinancing. For example, your mortgage costs shouldn’t total more than 29 percent of your income.

If you’re upside-down in your mortgage and unable to refinance to a lower rate, but you’re current on your payments, you may be eligible for the federal government’s underutilized Home Affordable Refinance Program, which expires June 10. If you got your home’s first mortgage before January 2009 and it’s owned or guaranteed by Fannie Mae or Freddie Mac and doesn’t exceed 125 percent of your home’s current value, you’re eligible. “The refinancing program is the Rodney Dangerfield of government programs,” says Greg McBride, senior financial analyst for Bankrate.com. “It doesn’t get any attention.” If you’re behind on your mortgage payments or experiencing financial hardship, investigate the government’s Home Affordable Modification Program. Although both programs suffered from a slow ramp-up in 2009, look for efficiency improvements in 2010.

2. Buy a house

If you’ve been sitting on the sidelines waiting for the right moment to make an offer, 2010 will be the time. Says Mark Vitner, a senior economist for Wells Fargo: “We’re not going to see dramatic increases in interest rates, but they’re likely to gradually move higher over the year.” If you’ll qualify for the $6,500 home-buyer tax credit for current owners or the $8,000 credit for first-time buyers, make an offer before winter ends. You need to be under contract by April 30 to get the tax break.

3. Keep an eye on your credit score

A good credit score is more important than ever for anyone trying to get approved for loans or credit cards in 2010 and qualify for the lowest rates. Lenders consider a credit score above 720 to be good. To learn your score, order your free credit report from annualcreditreport.com and spring for the $8 additional charge for the magic number. Or take the results from the credit report and feed the info into the Score Estimator at MyFICO.com.

4. Check for any closed credit card accounts

When you read your credit report, make sure all your credit card accounts all still open. You may have cards buried in a drawer that were canceled without your knowing it, and a credit-card cancelation could have reduced your credit score. Even after the new credit card law takes effect in February, issuers will still be allowed to cancel your account without notifying you. Believe it or not, “that’s not considered a material change in the terms of your account,” says John Ulzheimer, president of consumer education for Credit.com.

5. Consider a credit union

Interest rates on cards from credit unions are about 20 percent lower than at banks, according to an October 2009 study by Pew Charitable Trusts. One reason: Unlike banks, which can slap on sky-high rates, federally chartered credit unions can’t charge more than 18 percent. (State-chartered credit union rates are also capped at about that rate, but state laws vary.) You’ll have to become a credit union member to get a card; find one at FindACreditUnion.com.

6. Charge every card you have (sensibly)

In 2010, credit card companies will be looking for any excuse to lower your credit limit, raise your interest rate, or nix you as a customer. Banks are still dealing with a serious increase in uncollectible balances. Bank of America, for instance, wrote off 76 percent more in uncollectible loans in 2009 than the previous year. If you’re not charging on a card and not carrying a balance, you’re not making the company any cash. That means you’re creating a bulls-eye on your credit line. So charge at least a little on every card most months.

7. Fight higher rates and fees

No matter how good a customer you are, don’t be surprised if you get hit with higher rates or new fees in the coming year. If that happens, call the card issuer and politely, but firmly, ask the rep to reverse the move. If you’re a longstanding customer on good terms with the company, there’s a decent chance you’ll get satisfaction, especially if you threaten to walk. Ken Lim, CEO of CreditKarma.com, a credit-score service, says card issuers these days often toughen up “on a batch basis” without paying much attention to the particular cardholder’s history. “Or sometimes they’re simply relying on you not even noticing the change,” says Lim. “You’d be surprised what a phone call can do.”

8. Opt out of overdraft charges

Beginning in February, you’ll have to tell your credit card issuer if you want to be allowed the ability to go over your limit (and owe an overdraft fee of up to $39) when making a purchase. Starting in July, you’ll have to do the same thing with your debit card — that is, you must “opt in” if you want overdraft protection on your debit card purchases and ATM withdrawals. If you do nothing, you’ll automatically opt out of both.

Banks will lobby hard to get you to opt in and add this “protection,” so they can rack up overdraft fees. Don’t fall for the bait. “I can’t think of a reason why you’d want to opt in,” says McBride. True, you might get embarrassed if your card is declined in public. But to us, that seems better than having to cough up $39.

9. Add your college-age child to your card account

Starting in February, a child under 21 won’t be able to get a credit card without a parent or legal guardian as co-signer unless he has proof of enough income to afford the monthly payments. This will protect some kids from predatory credit card practices and getting hooked on credit before they’re old enough to drink. And that’s a good thing. But it also means that some college students will have a harder time developing their own credit history.

That’s where you come in. If you have a responsible teen and want to help her build credit, add her as an authorized user to a card of yours. But don’t cosign for plastic with your child. “There are too many downsides to cosigning,” says Ulzheimer. “Cosigning means equal liability for both parties.”

More on MoneyWatch:

• What to Do in 2010
• What to Do in 2010: Lower Your Taxes
• What to Do in 2010: New Investing Strategies
• Best Credit Cards for You
• 5 Big Refi Killers (and How to Avoid Them)
• Big Banks’ Sneakiest Tricks
• Video: 3 Rules for Refinancing