Credit Management
Whether you chalk them up to youth, inexperience, or outright foolishness, you’ve probably made a few questionable financial decisions over the years. While there’s no shame in making mistakes from time to time, your ability to learn from your money-related miscues doesn’t reduce their sting.
When it comes to managing your credit, the stakes are even higher. In addition to damaging your bank account and depleting any cash reserves that you might have been saving for a rainy day, poor credit decisions can wreak havoc on your financial reputation and make it difficult to impossible to borrow additional funds by traditional means.
Don’t let your financial past make the present more difficult than it has to be. If you’re sick of being denied for simple low-limit credit cards, being asked to put unreasonable amounts of cash down just to get an auto loan that you can afford, or losing hundreds or thousands of dollars to interest payments on your past-due credit card balances, take control of your financial well-being with these clutch credit management tips.
Unless you’re exceedingly frugal or independently wealthy, it’s practically impossible to get by these days without using some form of credit. You can expect to utilize a few basic credit products during your lifetime: credit cards, car and student loans, mortgages, and perhaps a business line of credit. If you’re unfortunate enough to suffer a serious injury or need to take responsibility for financing the long-term care of an aging family member, your medical bills will accrue interest and become a major debt burden in their own right.
As the most flexible credit product out there, credit cards are a double-edged sword. Used correctly, traditional credit cards confer the ability to borrow thousands of dollars interest-free for periods of a month or more. Though most financial professionals advise against using them for everyday purchases, it’s theoretically possible to “take out” a credit card “loan” to cover your entire monthly budget without a single dollar of debt to show for it.
In practice, credit cards are rarely used in this manner. If you use plastic regularly, you’ll probably find yourself carrying larger and larger monthly balances over time. Whether this is enough to send you into a debt spiral from which you’ll have difficulty recovering depends in large part on your choice of credit cards.
There are hundreds of different credit cards out there, all of which come with unique terms and conditions spelled out on pages and pages of fine print. There’s not a credit card out there that won’t get you into trouble if you habitually carry large balances on it without making a concerted effort to pay them off. The trick is to find the best house in a bad neighborhood, so to speak.
To that end, use an aggregator website like CreditCards.com to browse the voluminous library of extant credit cards by the issuer, category or individual card. While you should never spend more than you earn, it may be impossible to avoid debt completely. If you suspect that you’ll need to run a balance on your credit card at some point, look for low-interest products that offer special introductory rates.
You may get lucky and be able to pay off your balances before your card’s standard rate, which will probably vary between 10 and 20 percent, kicks in. These interest rates are usually expressed as an “APR,” which stands for “annual percentage rate.” Since they’re compounded monthly over the course of an entire year, APRs tend to be a bit higher than the monthly interest rate that’s often quoted in issuers’ promotional literature.
One major caveat about attractive credit-card offers: Your application for a card with a low or nonexistent introductory interest rate may be denied if you don’t have excellent credit. You should feel free to ask your issuer why you weren’t approved, but you may not get a straight answer.
You may not earn zero percent interest for the first year that your account is open, but you’ll be able to find a perfectly adequate card with a reasonable spending limit even if you have less-than-perfect credit. Interest rates on cards marketed to folks with fair credit generally start at around 19 percent and float upwards to 25 percent.
Remember, you’ll never have to worry about accruing unnecessary interest charges as long as you pay your bill in full each month. Even better, your credit score will improve with each payment, and eventually, you’ll be eligible for cash-back or rewards-bearing products that may actually earn you money over time. There’s often no limit on what you can earn with cash-back cards like Chase Freedom (creditcards.chase.com/freedom), and travel-focused products like American Express’s Delta Skymiles card (deltaskymilescard.com) promise free or reduced-fare flights with relatively few restrictions.
Once you find a credit card that’s worth space it occupies in your wallet, keeps it in its place. It may take some discipline at first, but you should avoid using it for anything other than unforeseen purchases or big-ticket items that you wouldn’t be able to afford until your next paycheck clears. Don’t use it to finance frivolous purchases, which might include expensive bottles of alcohol purchased for no particular occasion or deluxe propane grills intended to replace your perfectly-functional charcoal-fired device, as unchecked discretionary spending guarantees you a front-row seat on the train to insolvency.
If you do end up carrying a balance on your credit card, whether out of necessity or due to a lapse in judgment, you’ll need to attack the problem as if your life depended on it. After all, your financial life just might.
Most credit card issuers set their minimum payments so low that they don’t cover much more than the new interest charges on your outstanding balances each month. Thanks to a new piece of federal legislation known as the CARD Act (consumerfinance.gov), creditors are now required to disclose the full cost of paying the bare minimum each month, and it’s not pretty.
Taking the minimum-payment route to repay even modest balances in full can take years and cost hundreds of dollars in interest payments alone. Continuing to use your card while you’re trying to pay it off will further complicate matters and push you even further into debt. Use a minimum payment calculator (http://www.bills.com/minimum-payment-calculator/) to determine the full cost of making just the minimum payments on your outstanding balances.
Staying current on your minimum payments may be enough to keep your head above water, but it won’t help to improve your credit score. To keep a bad situation from getting worse, stop using your credit card at the first sign of trouble and plow as much of your take-home pay as possible into each monthly payment. You’ll eliminate hundreds or thousands of dollars in future interest charges and save yourself years of undue worry.
Effective credit management is more important than you may realize. Your credit score, which determines your perceived riskiness as a borrower, can be affected by a single missed payment towards an outstanding credit card, mortgage or auto loan balances. Your payment history, as the sum total of financial transfers to your creditors, is known, is one of the most important determinants of your ability to borrow money at a reasonable rate in the future. Protect it at all costs.
Spending within your means requires ironclad discipline in the short term, but it will pay off in spades in the long run. While you can’t avoid using credit completely, you can prevent it from ruining your financial future by seeking out favorable loan terms and paying down your disparate credit balances as soon as you can. As long as you’re armed with basic credit management skills, you’ll find it easy to avoid making the sorts of mistakes that may have ruined your credit in the past.