In our previous installment, we presented the advantages and drawbacks of working with a credit card. If you feel you are able to use a credit card correctly, here are a few recommendations:
Choose the right card. Make sure your card provides a grace period of at least twenty days from the purchase until payment is due. Otherwise, you’ll be charged interest before you even get your bill. Some cards offer airline miles, cash back on purchases, and other rewards programs. If you are using a credit card, you might as well get something in return. However, if there is an annual fee for your rewards card, make sure the benefits outweigh the cost.
Don’t have too many cards. Keeping track of even one credit card can be quite a challenge. With two or more cards, mistakes (such as missed payments or forgetting to cancel the card before annual fees kick in) are more likely to go by unnoticed. Unless you have a very good reason for keeping a second or third card, get rid of it.
What if you have already fallen into credit card debt? Here are some suggestions for climbing out of the morass. Ask for clemency. If you missed only one payment, call your credit card company. If you generally pay on time, they will occasionally agree to waive interest and late fees. Stop using your credit cards. If you’re already behind on your monthly payments, don’t accumulate more credit card debt. Although this may seem obvious, the tendency is actually the opposite. Once people owe money, they lose the psychological deterrent toward borrowing and let their debt inflate. (“If I already owe $60,000, another $5,000 won’t make any difference.”) Cut your losses now, and don’t allow yourself to charge even one additional item.
Take out a loan to pay off your credit card debt. Almost any type of loan is preferable to credit card debt because interest rates are generally much lower and there is a specific repayment timeframe. With a loan, you can work out terms that reflect your ability to repay, which disciplines you to repay a fixed sum every month. With credit card debt, there is no such discipline, since there is no obligation to repay anything more than the minimum payment.
Do a balance transfer to another card. Transferring your outstanding balance to a card with a lower interest rate will decrease the amount you carry from month to month. This will give you some breathing room. But this is a very stopgap measure. You can’t keep doing balance transfers for long since there are only so many transfers credit card companies will allow you to do. Besides, multiple balance transfers will throw your finances into chaos.
Find a card with a low interest rate. Shopping around for a card with a better interest rate can save you hundreds or even thousands of dollars a month (if your credit rating is good enough for you to be eligible for these offers). Look out, however, for introductory offers that end after several months or that limit the low rate to new purchases only.
Negotiate a better interest rate. Try asking your company to match another company’s interest rate offer. If they are unwilling to cooperate, mention that you may have to declare personal bankruptcy, if that is really an option. This gets the companies scared, because they are the ones who stand to lose from a bankruptcy.
Never, ever miss a minimum payment. Missing minimum payments can severely damage your credit rating. Having a good credit rating is important because many types of creditors — including utilities, hospitals, landlords, insurance companies, and banks — can report delinquent payments to credit bureaus and access your credit history. A late or missed payment on one charge account could up your rates and fees on a completely separate account — even your car insurance premiums.
Pay off credit card balances from smallest to largest. The smallest debts are easiest to pay off, and clearing them propels you most quickly toward getting your finances in order. The fewer debts you have to pay back, the easier it will be to see the light at the end of the tunnel, and the more motivated you will be to tackle the larger, scarier debts.
Get professional debt-counseling assistance. Climbing a mountain of credit card debt can be very tough to tackle alone. We encourage you to apply for Mesila’s family coaching program or to seek the guidance of a qualified debt counselor.
