eightthirty
07-08-2006, 03:57 PM
I'm all for taking credit where credit is due, but when it comes to credit cards, way too many of you are overdoing it. For Americans who don't pay their entire credit card bill each month, the average balance is close to $4,000. And when we zoom in on higher-income folks-- those with annual incomes between $75,000 and $100,000 -- the average balance clocks in at nearly $8,000. If you're paying, say, 18 percent interest on an $8,000 balance, and you make only the 2 percent minimum payment due each month, you are going to end up paying more than $22,000 in interest over the course of the 54 years it will take to get the balance down to zero.
That's absolute insanity.
And absolutely unnecessary.
If you have the desire to take control of your credit card mess, you can. It's just a matter of choice. I am not saying it will be easy, but there are plenty of strategies that can put you on a path out of credit card hell. And as I explain in the accompanying sidebar, even those of you who can't seem to turn the corner and become credit responsible on your own, can get plenty of help from qualified credit counseling services.
How to Be a Credit Card Shark
If you overspend just because you like to buy buy buy on credit, then you are what I call Broke by Choice. You are willfully making your own mess. I am not going to lecture you about how damaging this is; I'm hoping the fact that you're reading this article means you are ready to make a change.
But I also realize that some of you are Broke by Circumstance. I actually tell young adults in the dues-paying stage of their careers to lean on their credit cards if they don't yet make enough to always keep up with their bills. But the key is that if you rely on your credit cards to make ends meet, you must limit the plastic spending to true necessities, not indulgences. Buying groceries is a necessity. Buying dinner for you and your pals at a swank restaurant is an indulgence you can't afford if it will become part of your unpaid credit card balance.
But whether you are broke by choice or by circumstance, the strategy for getting out of credit card debt is the same: to outmaneuver the card companies with a strategy that assures you pay the lowest possible interest rate, for the shortest possible time, while avoiding all of the many snares and traps the card companies lay out for you.
Here's how to be a Credit Card Shark.
Take an Interest in your Rate
The average interest rate charged on credit cards is 15 percent, with plenty of folks paying 18 percent, 20 percent, or even more. If you carry a balance on any credit cards, your primary focus should be to get that rate down as low as possible.
Now then. If you have a FICO score of at least 720, and you make at least the minimum payment due each month, on time, you should be able to negotiate with your current credit card issuer to lower your rate. Call 'em up and let them know you plan to transfer your entire balance to another card with a lower rate -- more on this in a sec -- if they don't get your rate down.
If your card issuer doesn't step up to the plate and give you a better deal, then do indeed start shopping around for a new card with a sweet intro offer. For those of you with strong FICO scores, a zero-rate deal ought to be possible. You can search for top card deals at the Yahoo! Finance Credit Card Center (http://finance.yahoo.com/creditcards).
Don't forget, though, that the key with balance transfer offers is to find out what your rate will be when the intro period expires in six months to a year. If your zero rate will skyrocket to 20 percent, that's a crappy deal, unless you are absolutely 100 percent sure you will get the balance paid off before the rate changes. (And if you got yourself into card hell in the first place, I wouldn't be betting on you having the ability to wipe out your problem in just six months...)
Once you are approved for the new low- or zero-rate card, move as much of your high-rate balances onto this new card. But don't -- I repeat, do NOT -- use the new card for new purchases. Hidden in the fine print on these deals are provisions stating, first, that any new purchases you make on the card will come with a high interest rate, and second, that you'll be paying that high interest on the entirety of your new purchase charges until you pay off every last cent of the balance transfer amount. This, to put it mildly, could really screw up your zero-rate deal. So please, use the new card only to park your old high-rate debt, and not to shop with.
Another careless mistake you can make is to cancel your old cards. Don't do that either. Those cards hold some valuable "history" that's used to compute your FICO credit score. If you cancel the cards, you cancel your history, and your FICO score can take a hit. If you are worried about the temptation of using the cards, just get out your scissors and give them a good trim. That way you can't use 'em, but your history stays on your record.
Coddle Your New Card
When you do a balance transfer, you need to protect your low rate as if it were an endangered species -- because if the credit card issuer has anything to say about it, it will be. Look, you don't really think the card company is excited about charging you no interest, do you? How the heck do they make money off of that? They only offer up the great deal to lure you over to their card. Then they start working overtime trying to get you to screw up so they have an excuse to change your zero interest rate, often to as much as 20 percent or more.
And the big screw-up they are hoping you don't know about is buried down in the fine print of your card agreement: make one late payment and you can kiss your zero deal good-bye. Even worse is that card companies are now scouring all your credit cards -- remember, they can check your credit reports -- to see if you have been late on any card, not just their card. So even if you always pay the zero-rate card on time, if you are late on any other card, your zero deal can be in jeopardy.
That's why I want you to make to make sure every credit card bill is paid ahead of schedule. Don't mail it in on the day it is due; that's late. Mail it in at least five days early. Better yet, convert your card to online bill pay so you can zap your payments over in time every month. And remember, it's only the minimum monthly payment that needs to be paid. That's not asking a lot.
When You Can't Zero-in on a Better Deal
If your FICO score is a good bit below 720, you're not going to get a zero-rate deal. At least not right now. But you can definitely change your credit profile and qualify down the road if you make the moves that will boost your score.
The first and most fundamental thing is to make your minimum monthly payment on time every month. That is the single biggest way to impress the credit score folks. After awhile, your record of paying on time is going to begin raising your FICO score.
Of course, it will also help to start paying down your balances, so your overall debt-to-available-credit ratio declines. This is another big factor in figuring your FICO score: the higher your ratio, the lower your score. For example, let's say you have a combined $5,000 in balances on three cards. And those three cards have a combined credit limit of $15,000. That means your debt-to-credit limit is 33 percent. If you can get your balance down to $4,000, your ratio falls to 26.7 percent. Keep getting the ratio lower and your FICO score will begin to move higher. (By the way, another tactic is to call up your credit card issuer and ask for your credit limit to be boosted. If your balances stay the same but your total credit limit rises, your ratio is going to fall. However, I am not suggesting that anyone with a spending problem take this route! The only time you should try this gambit is if you are convinced you will not run up more charges once your credit limit is raised.)
That's absolute insanity.
And absolutely unnecessary.
If you have the desire to take control of your credit card mess, you can. It's just a matter of choice. I am not saying it will be easy, but there are plenty of strategies that can put you on a path out of credit card hell. And as I explain in the accompanying sidebar, even those of you who can't seem to turn the corner and become credit responsible on your own, can get plenty of help from qualified credit counseling services.
How to Be a Credit Card Shark
If you overspend just because you like to buy buy buy on credit, then you are what I call Broke by Choice. You are willfully making your own mess. I am not going to lecture you about how damaging this is; I'm hoping the fact that you're reading this article means you are ready to make a change.
But I also realize that some of you are Broke by Circumstance. I actually tell young adults in the dues-paying stage of their careers to lean on their credit cards if they don't yet make enough to always keep up with their bills. But the key is that if you rely on your credit cards to make ends meet, you must limit the plastic spending to true necessities, not indulgences. Buying groceries is a necessity. Buying dinner for you and your pals at a swank restaurant is an indulgence you can't afford if it will become part of your unpaid credit card balance.
But whether you are broke by choice or by circumstance, the strategy for getting out of credit card debt is the same: to outmaneuver the card companies with a strategy that assures you pay the lowest possible interest rate, for the shortest possible time, while avoiding all of the many snares and traps the card companies lay out for you.
Here's how to be a Credit Card Shark.
Take an Interest in your Rate
The average interest rate charged on credit cards is 15 percent, with plenty of folks paying 18 percent, 20 percent, or even more. If you carry a balance on any credit cards, your primary focus should be to get that rate down as low as possible.
Now then. If you have a FICO score of at least 720, and you make at least the minimum payment due each month, on time, you should be able to negotiate with your current credit card issuer to lower your rate. Call 'em up and let them know you plan to transfer your entire balance to another card with a lower rate -- more on this in a sec -- if they don't get your rate down.
If your card issuer doesn't step up to the plate and give you a better deal, then do indeed start shopping around for a new card with a sweet intro offer. For those of you with strong FICO scores, a zero-rate deal ought to be possible. You can search for top card deals at the Yahoo! Finance Credit Card Center (http://finance.yahoo.com/creditcards).
Don't forget, though, that the key with balance transfer offers is to find out what your rate will be when the intro period expires in six months to a year. If your zero rate will skyrocket to 20 percent, that's a crappy deal, unless you are absolutely 100 percent sure you will get the balance paid off before the rate changes. (And if you got yourself into card hell in the first place, I wouldn't be betting on you having the ability to wipe out your problem in just six months...)
Once you are approved for the new low- or zero-rate card, move as much of your high-rate balances onto this new card. But don't -- I repeat, do NOT -- use the new card for new purchases. Hidden in the fine print on these deals are provisions stating, first, that any new purchases you make on the card will come with a high interest rate, and second, that you'll be paying that high interest on the entirety of your new purchase charges until you pay off every last cent of the balance transfer amount. This, to put it mildly, could really screw up your zero-rate deal. So please, use the new card only to park your old high-rate debt, and not to shop with.
Another careless mistake you can make is to cancel your old cards. Don't do that either. Those cards hold some valuable "history" that's used to compute your FICO credit score. If you cancel the cards, you cancel your history, and your FICO score can take a hit. If you are worried about the temptation of using the cards, just get out your scissors and give them a good trim. That way you can't use 'em, but your history stays on your record.
Coddle Your New Card
When you do a balance transfer, you need to protect your low rate as if it were an endangered species -- because if the credit card issuer has anything to say about it, it will be. Look, you don't really think the card company is excited about charging you no interest, do you? How the heck do they make money off of that? They only offer up the great deal to lure you over to their card. Then they start working overtime trying to get you to screw up so they have an excuse to change your zero interest rate, often to as much as 20 percent or more.
And the big screw-up they are hoping you don't know about is buried down in the fine print of your card agreement: make one late payment and you can kiss your zero deal good-bye. Even worse is that card companies are now scouring all your credit cards -- remember, they can check your credit reports -- to see if you have been late on any card, not just their card. So even if you always pay the zero-rate card on time, if you are late on any other card, your zero deal can be in jeopardy.
That's why I want you to make to make sure every credit card bill is paid ahead of schedule. Don't mail it in on the day it is due; that's late. Mail it in at least five days early. Better yet, convert your card to online bill pay so you can zap your payments over in time every month. And remember, it's only the minimum monthly payment that needs to be paid. That's not asking a lot.
When You Can't Zero-in on a Better Deal
If your FICO score is a good bit below 720, you're not going to get a zero-rate deal. At least not right now. But you can definitely change your credit profile and qualify down the road if you make the moves that will boost your score.
The first and most fundamental thing is to make your minimum monthly payment on time every month. That is the single biggest way to impress the credit score folks. After awhile, your record of paying on time is going to begin raising your FICO score.
Of course, it will also help to start paying down your balances, so your overall debt-to-available-credit ratio declines. This is another big factor in figuring your FICO score: the higher your ratio, the lower your score. For example, let's say you have a combined $5,000 in balances on three cards. And those three cards have a combined credit limit of $15,000. That means your debt-to-credit limit is 33 percent. If you can get your balance down to $4,000, your ratio falls to 26.7 percent. Keep getting the ratio lower and your FICO score will begin to move higher. (By the way, another tactic is to call up your credit card issuer and ask for your credit limit to be boosted. If your balances stay the same but your total credit limit rises, your ratio is going to fall. However, I am not suggesting that anyone with a spending problem take this route! The only time you should try this gambit is if you are convinced you will not run up more charges once your credit limit is raised.)