By Don Rose, Writer, Life Alert
As 2008 winds down, most experts agree that these are tough times when it comes to money. However, when the going gets tough, the tough get going – as in going over the basics of dealing with money. Especially credit, which can be terribly tempting to tap into when savings are scarce. A little dip is fine, but when you dive in too deep, your best chance of getting rescued is by getting back to financial basics. This article presents some advice to help you, in the form of ten credit card commandments.
A Credit Credo
Before reviewing these rules of the road to help manage credit cards -- and help deal with the companies that provide them -- let’s take one brief detour.
In the process of creating credible credit card commandments, I came up with a credit credo: “Once you get it, don’t regret it.” This motto has multiple meanings. First, obtaining credit cards to help pay bills over time is fine, but you need a plan to manage the resulting debt, especially when the degree of credit card usage rises during tough times. Learn the most important rules for handling credit cards, and you won’t regret getting those cards in the first place. The second meaning: once you buy something using a credit card, don’t regret having bought it by paying much more for that item over time. This can occur if you only pay the minimum payment each month. Doing so adds a great deal to the final cost, thanks to accumulating interest charges on the amount you spent.
Ten Rules for Managing Credit Cards
Let’s assume you have two or more credit cards, you have bought some items with them, and now you have a good deal of debt to deal with. To help you manage this debt, and avoid regretting getting the cards and the creature comforts you charged, consider the following ten tenets of dealing with credit cards. (Extra credit if you already know them.)
1. Pay down credit card balances with your extra cash, rather than investing that cash.
When you pay down the balance of a card that charges 18 percent interest per year, it is like getting a guaranteed 18 percent annual return on the money you used to pay it down. It’s not easy to find investments that guarantee an 18 percent gain, so rule number one almost always applies. The general rule is this: if a credit card interest rate is more than the rate of return of an investment you are considering, pay down that card; if less, invest.
2. Pay down high-interest credit card balances first.
In other words, address what is causing the biggest dent in your wallet first. Then, once that card balance is zero, pay down the card with the next highest interest rate, and so on. To help you remember this rule, here is another way to look at it (which rhymes): Pay off the cards with low interest rates last, since they do not damage your wallet as fast.
3. Pay bills on time to avoid fees, credit report damage, and other penalties.
Typical late fees range from $29 to $39, and if you are over 30 days late many credit card companies will report you to one or more of the big three credit reporting agencies. Another negative of being late: the credit card company can impose other restrictions, like raising your annual APR (interest rate) as a penalty for lateness. Strive to pay your minimum payment (preferably more) at least a week before the due date; this will cause less stress, thanks to the one week time cushion for your payment to reach its destination.
4. Pay more than the minimum payment each month.
There are at least two good reasons for doing this. First, you will pay down the debt faster the more you pay each month, meaning you will ultimately pay less in total interest. Second, it looks better to the credit card company (and the credit reporting agencies) if you pay more than the minimum. Paying just the minimum sends the signal that you are barely scraping by, and hence not as good a credit risk, which can in some cases result in the card company raising your annual interest rate or lowering your credit limit (or both).
5. Reduce credit card balances, but don’t get rid of zero-balance cards.
It is good to get your card balances down to zero as fast as possible, but resist the urge to get rid of cards once they have no balance. In addition to being a good backup or safety hedge in case of emergencies, your credit score is helped by having cards with small or zero balances. This is because FICO scores take into account the ratio of your total outstanding credit balance (across all cards) to the total amount of all your cards’ credit limits. The smaller this ratio, the better your score. The more zero-balance cards you have, the lower this ratio will be, which is desirable. Having zero-balance cards also shows you can manage credit, unlike folks who have most or all of their cards maxed out.
6. Consider cultivating a cash-only credo (cutting out credit).
The only way to reduce your credit card balances is to pay them off faster than you spend on them. Stopping spending on credit cards is the quickest path to a debt-free state. If you cut credit card usage to zero (or use them only for emergencies), you will not only reduce your outstanding credit card debt faster, but you can plan better and calculate when those balances will go to zero. Steady reduction in your balances month after month also looks good to credit reporting agencies. If you insist on using the cards, consider an alternate strategy: paying off whatever you spend each month plus the minimum payment due.
7. If you are not having success with a customer service rep, ask for a supervisor.
Seven of the most useful words in the English language are: “May I talk to a supervisor, please?” If a regular customer rep can’t accommodate you, a supervisor often can. This applies to asking for a credit card fee waiver or any other issue related to that company.
8. If you pay late and get a late fee, ask customer service for a courtesy fee waiver.
If you ask, ye shall receive. Most know this saying, yet many don’t apply it in the real world. It does work, in the majority of cases. Most card companies are willing to help you. They can often credit back a late fee (especially if you have not been late before, or if it’s been a long time since you were late), or they can reduce the late fee (e.g., cut it in half). The longer you have been with your credit card company, the more leverage you have in asking for some relief. Also, if a late payment was not your fault (e.g., lost mail, a late statement, website issues, etc.), tell the supervisor this; it is easier for the supervisor to justify a waiver or reduction if something outside your control caused you to be late.
9. If your credit card company’s interest rate (APR) is too high, ask for a lower rate.
Another example of “If you ask, ye shall receive.” It cannot hurt to ask for a lower rate, which will mean less interest being charged to your account, which means you will be able to pay off that card faster. If you make payments on time, month after month, you become more reliable in the credit card company’s eyes, and hence it’s more likely you’ll be eligible for a lower APR. Many credit card companies automatically offer you a lower rate when you qualify, but if that call doesn’t come, take the initiative and ask for a lower rate yourself. If the first customer rep you ask says no, remember to ask for a supervisor!
10. Give yourself credit.
Not in the literal sense, but rather, take a moment to savor how good it feels each time you pay off another credit card. Congratulate yourself for a job well done. Then, after a bountiful bout of back-patting, get right back to paying off the rest of your cards. Before you know it, you’ll be debt free, or close to it. And you will feel… in-credit-able!