| “Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” – Ogden Nash
One of the easiest and fastest ways to accumulate debt is the improper use of credit cards. Such careless credit spending will also mess up your credit score and therefore your ability to borrow necessary funds at the best rates. Did you know that credit card companies can raise your interest rates without even notifying you? That’s right. It’s called “universal default.” A company can raise your interest rate on what you owe them based on your history with other lenders. It can be due to a late payment, a bounced payment, exceeding your credit line, or decreasing your credit score. So if you’re late on a VISA payment, your MasterCard account can raise its rates. It sounds sinful, but it’s true.
That’s just one of the reasons it’s vital to pay off the balance on your credit cards at the end of every month. If you keep a hefty credit card balance, not only will exorbitant interest rates take a healthy bite from your savings, but as you can see, it also reflects on other credit companies which leads you into a terrible downward spiral of chasing borrowed money with more of your money while soiling your credit reputation. A bad credit rating can follow you for up to ten years and make lenders reluctant to loan to you when you really need to borrow money. One safe alternative to using a credit card is to use a debit card. That way you eliminate the risk of going into credit card debt.
Now should you desire to use a credit card – and I certainly do – the best one is a no-fee rewards card. This entitles you to some extra gift incentive for making purchases, such as airline mileage, gift certificates, or cash back, at no extra cost to you. But, I repeat, you must – as I do – pay off your debt in full every month. Because if you carry any balance the high interest rates will totally wipe out the rewards benefit, mess with your credit score, and decrease your chance of budgeting for success.
If you’re like many free-spenders and racked up debt on more than one credit card, the rough rule of thumb is to attack the highest-rate card first, rather than the card with the highest balance. But some financial planners take an alternative approach by suggesting to payoff the credit card with the lowest balance and then cut up the card. And then celebrate! For more information on credit counseling, I suggest you to contact a certified financial planner or the National Foundation for Credit Counseling at www.nfc.org.
In addition, paying off your credit card debt is your best investment. Suppose, for example, you’re paying 18% interest on your credit card balance. Paying off that debt is the rough equivalent of earning 18% on your money. And there’s no way you’ll find that rate at your local bank.
By the way, how is your credit? Do you know your current credit score? Have you ever even seen your credit report? There are three major credit bureaus – Equifax, Experian, and TransUnion – that gather information on your loans, credit applications, and bill payments. This historical data creates a clear picture of your creditworthiness. And it’s important for you to know what your picture looks like. You can order a free copy from each of the three bureaus by going online at: www.annualcreditreport.com. This is a simple action step to take to ensure your road to financial success doesn’t have any unseen potholes, and if it does, you can fill them in starting today. A federal study found that 70% of credit reports contain a mistake, which is another reason to check it. That’s a scary statistic when you think that your credit score can influence everything from loan rates you receive to insurance premiums you pay. So make sure you review your report with a fine-tooth comb for any errors in your personal data and any unfamiliar accounts – both of which are signs of ID theft. If you discover any mistakes, write to the credit bureau with your corrections.
Like any report score, once you know your number – and aim for as close to 800 as possible – you can focus on improving your grade. The best way to improve your credit score is to pay your bills on time, pay down the balances on your credit cards, and borrow no more than 30% of your available credit. Now that’s a financial plan. -- PC
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