|
Mastering Your Credit Card Debt Load
Yes
According to Everybody's Money magazine, there are two kinds of credit card users. The "convenience" user likes not having to carry cash or have checks approved at the check-out line. This type of user usually pays off the card balance in full each billing cycle. These users generally don't care about the annual percentage rate (APR) because they don't have to pay finance charges. However, a grace period is very important; without a grace period, you're charged interest from the day of purchase or the day that purchase is posted to your account, usually a day or two after you shop.
The true "credit" user rolls over a portion, or all, of the credit card balance each month, paying only the minimum due. These users find low interest rate and low annual fees, as well as no transaction or monthly fees, very attractive.
To illustrate the difference between a "credit" and "convenience" credit card user, suppose you have a credit card at 18% with a $1,000 limit, charged to the max. The "credit" user will pay only $20 a month and take eight years to pay off the loan at a cost of about $900 in interest. The "convenience" user will pay off the same charges within one year, paying less than $200 in interest.
Regardless of which type of card user you are, Everybody's Money offers the following practices to master your credit card debt load.
- Take inventory. How many credit cards do you have? What's the balance and minimum monthly payment on each? What's the total balance? If you find that your total balance is more than you thought or more than you can afford, it's time to make some immediate changes.
- Evaluate the cost of your credit card(s). What's the interest rate on each card? What annual fee are you paying? Does your card offer you a grace period? If you find that your card doesn't have the greatest features, it’s time to start shopping around.
- Get one low-fee, low-interest rate card and use it wisely. Too many cards can equal too many shopping sprees and, therefore, too many payments each month. If you're a "convenience" credit card user, look for one card with no annual fee. If you're a "credit" credit card user, shop around for a card with a low interest rate. The Credit Union National Association (CUNA) Economic and Research Department surveyed credit unions that offer credit cards. Findings show that credit unions have been charging as much as five percentage points less on their cards than banks, and often have low or no annual fees.
- Make the largest monthly payment you can afford. Sometimes, it's not always possible to pay your credit card off in full each month. Yet, you're going to want to avoid paying just the minimum payment your card requires. Often, you’ll be paying only the interest that has accrued without even touching the outstanding balance.
- Don't exceed your credit limit. Card issuers usually levy a hefty fee if you charge more than your limit. Keep in mind that your credit limit includes not only the dollar amount that you purchase, but also the interest that has accrued and been added to that balance.
- Keep track of your purchases. Don't just charge something and forget about it; be aware of what you’re spending. Using a checkbook register to record your purchases may help you keep track of your spending and also help you stay safely under your credit limit.
- Monitor your credit limit increases. Many card issuers reward good customers with frequent credit limit increases. While these increases may make you feel like a valued and responsible consumer, make sure you don't take advantage of them and spend more; that's what the creditors want you to do.
- Watch out for teaser rates. Your mailbox probably collects a few different credit card "pre-approvals" with fantastic introductory rates each day. Read the fine print! After about six months, that rate will probably jump to about twice the teaser rate and you may find yourself owing a large amount of money at a high interest rate.
- Be wary of reward cards. Before you sign up for a reward card, calculate what you're hoping to "buy" with the accumulated points and then figure out how much it might cost to pay for it yourself. Then, figure out how much you'll have to charge to earn that "free" item and add to the total the interest charges and annual fee you may be paying.
- Don't give up no matter how tough it gets. There are some hardships you just can't avoid that can do some real damage to your debt load. Still, no matter how hard it gets, keep making those minimum payments. If you find that you just can't make it, call your creditors before they call you. Generally, your card issuer will be willing to work out an alternative payment. If you still feel like you're drowning, consider contacting CreditAbility, a national nonprofit consumer credit counseling agency, at (800) 251-2227, for financial counseling and debt management services.
« Return to "Building Credit"