15 Most Important Lessons For Avoiding Credit Card Debt

So tempting...so dangerous. (k9ine via Flickr)

1. Credit cards are a loan

Credit cards are simply a mechanism for borrowing money. Most cardholders (2 out of 3) carry a balance. Card companies earn interest on these accounts.

The key to managing credit cards is understanding the terms of the credit card issuer loan.

As with any loan, you need to know:

1. Your interest rate
2. The amount of your monthly payment
3. When it is due
4. How you make payment
5. What happens if you're late
6. What happens if you request an amount beyond your approved loan (credit line)
7. How long will it take you to pay off your loan

2. Preapproved is not prequalified

Just because a card company is willing to give you a loan - a credit card - does not mean that person has reviewed and analyzed your ability to repay the loan.

Some people think that if they're offered a credit card, a banker must have concluded they are capable of repaying what is borrowed. That's not how it works.

3. Credit cards are going to be harder to get and to keep

Until recently, anyone who could fog a mirror could get a credit card. For those with a poor credit rating, the terms might have been expensive, but credit cards were still available.

But now, credit card issuers are nervous about the magnitude of defaults. As a result, credit card issuers are:

1. Making it harder to get a card
2. Raising required minimum payments
3. Increasing interest rates and fees
4. Creating new fees a cardholder must pay
5. Lowering credit limits
6. Canceling cards

Therefore, it's more important than ever to maintain a good credit score.

4, Low monthly payments are not your friend

Credit card issuers make money by lending you money and charging interest.

They do not like people who pay off their monthly balance every month. They prefer people who make the minimum monthly payment and carry a balance. The higher your balance, the more they like you.

That's why credit card issuers make the monthly minimums so low. The less you pay every month, the higher your balance. Those who pay only the required minimum often dig themselves into a hole.

Minimum Payments = Maximum Problems.

5. The Credit Card Act levels the playing field between card companies and cardholders

Effective February 22, 2010, the law changed in several important ways.

1. Card companies cannot change interest rates during the first year after a card is issued unless: a) a special offer expired, b) the rate is variable and the index rate changed, or c) the cardholder was more than 60 days late with a payment.
2. Card companies cannot change any important term in the card agreement, including interest rates after the first year, until they give the cardholder not less than 45 days advance notice. The cardholder can elect to terminate the card if unhappy with the new terms and pay off the remaining balance at the original rate. (Note: this may affect your credit rating, though.)
3. Card companies have to ask cardholders whether they want over-the-limit card protection. If the cardholder says 'No,' then the card company can refuse to pay purchases in excess of the card's limit.
4. Card companies must mail invoices at least 21 days before they are due.
5. Card companies must give cardholders prominent notice in invoices as to how long it will take to pay off a balance by only making the minimum monthly payments.

6. Make a budget!

How can you control your life and use debt responsibly if you do not know exactly what you are spending?

Making a budget means sitting down with a sheet of paper and identifying how much you have coming in every month, and how much you have going out. If you have more going out than coming in, you are "operating at a loss." When people operate at a loss, the spread between what comes in and what goes out is often bridged with debt - credit card borrowing.

Credit card borrowing is not in and of itself a bad thing. It allows you to cover shortfalls and enjoy products/services in advance of your ability to pay for them. But credit cards get dangerous when used indiscriminately.

7. Credit cards are deliberately designed to make borrowing very, very easy

It's no accident that credit cards are so small and thin.

Credit card issuers do not want you to think about the money you're borrowing when you swipe.

8. Watch for warning signs that you are incurring too much debt

Common warning signs include:

1. You delay opening your credit card bills.
2. You need more than 20 percent of your monthly take-home pay to make debt payments.
3. You don't make more than the required monthly payment for months at a time.
4. You have more than five cards.
5. You use your credit card without thinking about the fact you're borrowing money.

9. Protect yourself against credit card fraud

Do: Keep a record of your account numbers in a secure place; destroy carbons of credit card transactions; save receipts to compare against bills; notify card companies in advance of a change in your address.

Don't: Lend your card to anyone; give your credit card number over a cell phone; sign a receipt that has blank spaces; give your account number to a vendor you're unsure about.

10. Keep up your FICO score

Some tips:

1. Make all your payments on time.... Duh!
2. Be cautious about closing cards. You can choose not to use them, but by closing them you reduce your total borrowing power.
3. If you feel you need to close cards, close those you obtained most recently. FICO likes to see longevity in borrowing relationships.

11. Be a comparative shopper

Make sure you shop around.

Consider how you're going to use your card. If you're going to pay off your balance every month, then focus less on APR and more on rebates and rewards offerings. If you know you'll carry a balance, seek out a card with low APR.

12. Don't be sucked in by rebate or reward programs.

Curtis Arnold, founder of www.cardratings.com, advises people who are going to carry a balance not to select a card based on its reward offerings.

Credit card companies don't offer you rebates and rewards because they like you. They do it to encourage you to use their card. They hope you'll spend a lot and pay them lots of interest and fees (much more than the rewards are worth).

13. Credit card issuers do not want to lose your business

Credit card issuers want to make money, and that means they need to issue cards and maintain lending relationships. They'll always need customers.

So if you're hit with a late fee you don't like (or something similar), don't hesitate to call and ask to waive the fee. Be very polite, but make it clear that if the fee is not waived, you are prepared to close your card and transfer your balance to another card. (Bluffing isn't illegal.)

14. Learn the strategies for reducing debt

If you find yourself in a credit card hole, don't lose hope. There are many approaches to reducing debt.

1. Call you credit card company and explain your situation. Ask for a reduction of your interest rate, even if on a temporary basis.
2. Look for balance transfer opportunities at low rates.
3. If possible, pay more than your minimum payment.
4. Sell something and use it to pay down debt.
5. Consider seeking an adviser to develop a Debt Management Plan. The key is to find a reputable adviser (a good place to start).

15. Take personal responsibility

Your credit card company wants to take money out of your pocket and put it into theirs. That simple.

With minor exceptions (predatory lending), they're not doing this illegally. They may be handing you a shovel, but they don't force you to dig.

You have the power in the relationship. Ultimately, it's your choice whether the winner of the credit card game is YOU or the credit card company. You can use your credit cards responsibly. (It's simply a matter of willpower.)

Remember: credit card companies are not your friend. They are in business to make money. Protect yourself.

Learn more about credit cards and how to avoid or get out of debt with The Skinny On Credit Cards.

Comments

[Todd Post]

If you budget, save and use cash, there is no need for you to "build credit", even for buying a house. Bottom line, debt is dumb, cash is king! I heartily recommend people check out http://www.daveramsey.com/article/the-truth-about-credit-card-debt/lifeandmoney_creditcards/

[Apps 55753818692 503358562 F89adc3f6810a6d68b9e22853f4b8941]

Shouldn't the number one rule be "Don't use credit cards?" ;-)

[Jake]

Todd, I'd love to save money for the rest of my life so I can pay for my house in cash after renting till I'm 97 years old.

[Doris Hullett]

Hi Jim,
This is a very thorough article on credit card debt. Great post.

Doris Hullett
http://www.aYellowJournal.blogspot.com

[Jim Randel]

Todd,

I can't agree with you and dave ramsey that debt is dumb. Debt is a tool that can be used to forge your way forward.

Like any tool, it can cut you. But if used correctly, it can make your life a lot easier. The key is NOT to swear off all debt. The key is to learn how to use it to your favor.

Thanks for your feedback.
Jim