While Washington is pinning its hopes for a revitalized economy on the spending habits of consumers, financial experts are advising a halt to discretionary spending, and Americans are heeding the advice.

New reports show borrowing is down and savings are up – indicating the average American’s concern with being able to pay bills and maintain a good credit rating.

Many consumers are also taking advantage of free credit reports to keep a close watch on their FICO scores and to be immediately alerted to mistakes and signs of identity theft.

But there’s one decision conservative borrowers are making that could hurt even while it helps. That is the decision to move outstanding credit card balances from high interest cards to lower interest cards.

Consolidating balances in that way is smart in that it puts more dollars toward paying down debt and fewer dollars toward paying interest, but it could hurt FICO scores, and that could hurt in the long run.

Under the current FICO credit scoring system, your score will be better if your debt is spread out among all your available credit – so that you use no more than 30% of the credit available on any one card. In fact, some experts say you shouldn’t use more than 10%.

Even when your total debt remains the same, if it is concentrated in one card and that concentration brings your use of that card over 30%, your score will begin to fall. If you get up close to “maxing out” the card, your score will suffer even more – even if you have a zero balance on several other cards.

FICO is instituting a new scoring system this year, and this problem could be addressed, but we have read nothing to indicate that it will. So in the meantime, consider this move carefully, and take another step before you decide.

Before making any decision, contact your card issuers. Ask to have your interest and credit limits restored to their previous levels. If the first representative refuses to discuss it, hang up and call again. If you don’t get results, ask to speak with a supervisor.

If you’ve been a good customer – always paying on time – they should be willing to work with you. If they hesitate, let them know that you’ll be transferring your balance.

Your decision to consolidate will help you get out of debt faster, but it will lower your scores. So consider your plans for the coming months and decide if a temporary drop in credit scores will affect your life negatively. If not, then go for consolidation and get out of debt as fast as you can.

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Low credit scores and the difficulty of qualifying for loans may be the cause, since lenders have tightened requirements in the face of massive losses.

Buying a home now calls for a score of 720, and the best rates – now at 5.1% on average – now go to those with a score of 760 or more. Even buying a car requires a good score – with 720 being the ticket to low interest financing on a new car.

With the national average score hovering around 680, most prospective borrowers have some work to do before qualifying.

Or, it could be that consumers have voluntarily changed their spending habits.

Whatever the reason, new figures from the Federal Reserve show that consumers reduced their borrowing by a record $7.94 billion during the month of November. This is the largest dollar-amount drop in the history of record-keeping. It’s also the largest percentage drop since January 1998.

Revolving debt, which includes credit cards, dropped by $2.8 billion while other debt, such as automobile loans, dropped by $5.2 billion. Economist Ken Mayland is quoted as predicting that this reduction will continue well into 2009.

Economists and financial consultants have been advising consumers to cut back on spending for several months – while the government has been urging spending as a way to bolster the sagging economy. In fact, when the stimulus checks were mailed in 2008, welfare recipients were told that they must either “Spend it or lose it.”

And yet, millions of consumers either cannot or will not take on more debt.

Meanwhile, bargains abound for both home buyers and car buyers. The glut of foreclosed properties and short sales has forced prices downward. It’s also swollen the number of homes for sale to a point where many areas have at least a 24 month inventory. (This is determined by dividing the number of homes for sale by the number sold, on average, per month.)

Mortgage lenders lose money every month those “REO” homes are held in inventory, so prices will continue to drop.

Car dealers are also offering bargains, especially on their least popular models. A borrower with a high credit score can get a 0% 36-month loan on some cars, and rates as low as 2.99% on others.

If you’re considering joining the ranks of buyers taking advantage of these bargains, check your credit report and scores before you go shopping. If your scores aren’t quite where they need to be for the best rates, take steps to raise them.

Don’t assume that your scores are fine just because you don’t owe much and you pay all your bills on time. A variety of factors, including data entry errors, can affect your score. Industry experts estimate that approximately 25% of all credit reports contain some kind of error – and many of those are errors that can lower your score.

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Minimum payments on credit card balances were designed as a tool to help consumers when unexpected debts arise or a breadwinner is off work for some reason. Nevertheless, about 5% of all consumers routinely pay just the minimum each month.

Prior to regulations which went into effect in 2003, credit card issuers could set a minimum that was far less than the interest accrued each month, causing these “minimum payment” borrowers to go further in debt with each passing month – even without additional spending.

In 2003 Federal regulators stepped in with standards that ensure that the current balance can be amortized over time, but even these minimums will keep consumers in debt for far too long, and will result in huge interest payments.

Under current standards, the minimum must reflect a payment of at least 1% on the balance, plus current interest. If that interest happens to be 20%, the debt will double in 5 years. Meanwhile, at only 1% repayment per month, it will take 8 1/3 years to pay off the principal. The borrower will have paid 160% of the original amount in interest.

A second drawback of paying just the minimum is that the practice puts a label on the borrower. They’re seen as a greater risk, and so – of course- the credit card companies raise their interest rates!

Now, with the country in what has finally been labeled as a “recession,” many credit card users are no longer able to meet even monthly minimums. In response, some credit card issuers have instituted programs to help consumers get back on track. They’re waiving over limit fees and lowering annual percentage rates.

Some card issuers, such as Chase Bank, are offering Settlement Plans to let consumers settle their outstanding balances for 50% or less than the balance due. Of course, if a consumer was unable to meet a monthly minimum, the likelihood that they can suddenly pay off even half of the balance due is probably slim.

The best advice from financial experts is to pay as much as you can each month, and retire that credit card debt as soon as possible.

Just remember not to close the account once it’s paid off – having that unused and available credit will serve to raise your FICO scores. Even if you aren’t in the market for a new loan today, circumstances change.

Work to keep your credit rating high, because it affects more than just your ability to obtain a loan. Everyone from potential landlords or employers to cell phone providers judges you by that FICO score.

Our advice: get a copy of your credit report today, examine it to check for possible errors or signs of identity theft, then consider all the ways that you can raise that score all the way to the top.