How to avoid real-life credit disasters

We've all heard horror stories of credit card fraud and runaway debt. Here are some tips on how to protect yourself.
Borrowing money wisely can help you accomplish goals you’d otherwise be unable to attain, such as owning a home or getting an education. But credit can also get you into trouble if you’re not aware of its potential dangers. Here are some examples drawn from real life, along with tips on how to make sure they don’t happen to you.

Fraud and scam artists
Tom received a call from a man who identified himself as a member of the anti-fraud department of his credit card issuer. “Did you recently purchase an item from XYZ Marketing for $450?” the man asked. When Tom said no, the caller continued: “That’s what we thought. This company is currently under investigation for fraud. We’ll process a refund immediately, but I need to verify the three-digit code on the back of your card.” Tom read the number, and the caller confirmed it was correct. A week later, Tom received his statement in the mail. It included a brand-new charge for $450.

Tom was the victim of a scam designed to trick people into revealing the verification code on their credit card. Many merchants cannot process transactions unless you provide this three-digit number, which ensures that you have the card in your possession. To protect yourself, never reveal your credit card information to someone who calls to request it, no matter what story they feed you. Most legitimate credit card companies do not do this with their customers, and if you suspect foul play, hang up and call your credit card issuer back to verify the call. Same goes for your bank account -- never reveal your account details or PIN number. If you suspect you have been scammed, call you card issuer or bank immediately to report it.

Delinquent co-signers
Paula had been divorced for six months when she applied for a mortgage. When the lender checked her credit report, they declined her application because her line of credit was five months in arrears. Paula protested that her ex-husband had agreed to pay off the line of credit as part of their divorce settlement. The loans officer explained that while he was sorry, there was nothing he could do.

Paula discovered the hard way that divorce does not get you off the hook for credit accounts held jointly with a former spouse. Even though Paula’s husband agreed in writing to pay off the line of credit, the lender is not obliged to recognize that agreement -- Paula was still legally responsible for the debt. If you are in the process of divorce, make sure that any joint credit accounts are closed and refinanced during the settlement. That way, if your ex doesn’t pay his or her share, you’re not responsible.

Mortgaging tomorrow to pay for today
Colin made a good salary and felt he deserved the finer things in life -- a luxury SUV, a big house with a swimming pool and dinners at expensive restaurants. His philosophy was always “buy now, pay later.” He bought his home and vehicle with no money down and charged everything to his credit cards, making the minimum payment each month. Then Colin was downsized out of his job, leaving him $300,000 in debt with no way to pay it off. In the end, he was forced to declare bankruptcy.

Smart borrowers use credit with an eye to the future and are careful not to live way beyond their means. Colin spent years racking up high-interest debt to finance a lifestyle he could not afford. Even if you’re not a spendthrift, you may still end up in trouble if you never pay more than the minimum payment on your credit cards or if you’re constantly borrowing from one account to pay off another.

Already feeling over your head in debt? Talk to a credit counselor or financial planner who can walk you through some options for regaining control of your finances, including a debt consolidation loan.