Beating the Credit Card Blues

Used properly, credit can be a helpful tool for managing your finances. It’s convenient for purchasing fitness products over the phone or online, and it’s an easy way to track your business expenditures for tax purposes. Good credit management habits will mean good credit ratings, which will be a key factor in helping you achieve your personal and financial goals.

Misusing credit, however, can cost you plenty in the way of money and problems. Poorly managed credit negatively impacts your credit reports and scores, which can make it difficult to purchase large items. Poor credit reports and scores can also make it difficult or perhaps impossible to purchase a home or to refinance one you already own.

Learn why it’s so harmful to rack up an ongoing credit card balance, how you can stay on track with credit, and what to do if you do accumulate significant debt.

Many people carry hundreds or even thousands of dollars of credit card debt from month to month and pay only minimum balances. Carrying a balance easily snowballs into big debt. If you had a $3,000 balance, for example, and did not charge anything else while you were paying it off, it could be literally decades before you paid off the balance (see chart below).

If you don’t pay your balance in full or on time, the consequences will be interest, late fees, over-credit-limit fees, penalty fees and possibly bounced-check fees. The late, over-limit and check fees can range from $25 to $39 every month. Interest and penalty fees are based upon your annual percentage rate (APR), which can reach as high as 34.99% for people with poor credit. Ouch!

Using Cards Wisely

Not using a credit card at all is the best way to ensure that you have no credit card debt. However, this may not be practical. The next best way to prevent debt? Except in cases of emergency, don’t use a card unless you plan to pay off the charge in the first billing cycle. Once you start not paying in full, it can be extremely difficult to get back on track.

If an emergency requires you to carry a balance, plan to pay it off in the shortest period possible. Pay off the debt before you save for special items or even save for your retirement. After all, by paying off the debt you are getting a guaranteed return on your investment: the APR saved. In the above example, that means 12%, 18% or 21%. You’d be hard-pressed to get this type of guaranteed return with other investments!

To help you manage your credit seriously, consider preparing and using a budget. Monitor your spending compared with your budget, and alter your spending habits if you need to do so. By simply calculating the difference between net monthly income and fixed monthly expenses, you can better understand exactly how much money you can afford to spend on variable and nonessential expenditures. (For tips on creating a budget, see “Face Your Finances,” by Kay L. Cross, MEd, April 2005 IDEA Trainer Success, pp. 12–13.)

If you are worried that you are likely to accrue credit card debt, then you need to be especially cautious about which credit cards you use. Many credit cards offer rewards programs and travel bonuses to encourage you to use them. Make sure you understand the rules of your credit card company, since every company—and every card—has its own set of regulations.

Do you need credit cards with better rates or policies? Research different cards from various banks. Ask yourself:

• Is the bank nationally respected?
• Is the card accepted at places where you are likely to shop?
• Is the APR reasonable?
• Will the APR be fixed or variable?
• Does the fine print say that upon short notice (sometimes as little as 15 days) the APR can change?
• How long of a grace period, if any, do you have before payment is due?
• Does the interest begin accruing as of the dates of your purchases or only if you don’t pay the balance in full each month? The difference in total costs to you can be immense.

Some cards have no annual fee, while others have fees that range anywhere from $25 to $395, depending on the company and the type of card. If you are applying for a card offering a 0% APR, know that there is always a time limit for these teaser rates. Monitor the time if you take advantage of such an offer. Also, be wary of transferring balances to “low” or 0% APR cards. In almost all cases, you pay a fee for transferring your balance.

If you like the rewards from having credit cards but do not want to manage them, consider obtaining a debit card. With such a card the money is withdrawn from your checking account at the time of the transaction. You can then reserve your credit cards for emergencies.

Because of the explosion of identity theft, you must also take care to protect your credit card information. Unauthorized use of credit cards can damage your credit and cost you both time and money to resolve the issues.

When you use a card to make a purchase, make sure the merchant doesn’t write down your name, account number and expiration date. In addition, be aware of people standing behind you in line who are using telephones that might have digital cameras. These people can and sometimes do photograph your credit card and then use your information.

12% $ 5,696 20.6

18% $10,931 37.5

21% $21,198 50+

Source: “The ABCs of Credit Card Finance” from the Center for Student Credit Card Education Inc.

The following resources provide information that can help you become a more savvy credit card consumer.

BankRate.com, www.bankrate.com/brm /rate/cc_home.asp?link=5. The credit card section of BankRate.com gives you tips on finding the best credit card for you and on how to best transfer a balance to a card with a lower fee and/or annual percentage rate. This site also provides a debt planner to help you quickly pay off credit card balances.

Consumer Action, www.consumer- action.org/English/CANews/2004_May_CreditCard/. The “2004 Credit Card Survey” examines 140 cards from 45 issuers. It documents increased penalty fees and rates, “zero interest” introductory offers, cash-advance rates, currency-conversion fees, rewards cards and more.

The Federal Trade Commission’s Website on Credit, www.ftc.gov/bcp /conline/edcams/credit/index.html . “Avoiding Credit and Charge Card Fraud” describes the steps that make it more difficult for a crook to capture your card or card numbers, and explains how to report losses and fraud.

The Federal Reserve Board, www .federalreserve.gov/pubs/shop/default .htm. Get help on finding the best credit card for your needs and on learning your rights when using a credit card.

Despite your best intentions, you may find yourself facing unmanageable credit card debt. If you do, make sure you communicate with your creditor(s). Paying bills late or not paying at all is much worse than addressing the issue head-on. If your credit report and score are in good shape, many creditors will try to work with you. They may give you a lower interest rate or a smaller minimum payment. Be aware that these changes may just

lengthen the time for repayment of the debt.

If your credit card company won’t work with you, contact a consumer credit counseling service. You can locate one at the National Foundation for Credit Counseling, www.nfcc.org or (800) 388-2227. A service will help you by negotiating substantially lower rates, partial charge-offs of balances and more liberal repayment terms. However, this information will be reported to the three

major credit rating services and will show up on your credit report for years.

The last resort is filing for personal bankruptcy. Bankruptcy may relieve you of all of your debts to give you a fresh start, but it comes with many downsides. Before considering such action, speak to an attorney who specializes in bankruptcy and find out all of the personal and financial repercussions to you.