Credit Card Crunch

By Diane Tait

Image courtesy flickr

If you’re like most Americans, after the holiday season your credit cards are practically hot to the touch.  That’s because they get a real workout in November and December.  Having access to credit cards is a real convenience and a real danger.  That’s because they allow you to buy things with money you have yet to earn.  Like any lender, credit card companies make their money by charging interest on outstanding debt.  Unless you can afford to pay your cards off completely every month, you can quickly get in over your head in debt using credit cards.  To help you avoid a debt bomb that can quickly spiral out of control, I thought I’d give you a few tips on how to avoid the credit card crunch.

The numbers game – Having good credit is almost as important as having good health nowadays.  That’s because it’s hard to live well without either one.  While having good health keeps you out of the doctor’s office, having good credit opens up a lot of doors for you.  Those with high credit scores not only get offered lower interest rates on credit cards and loans, it also helps them get better insurance rates and job offers.  That’s right, everyone from HR directors to landlords use credit checks to help weed out applicants.  That means the higher your credit score, the more opportunities you will have.  The problem for many people is having good credit and keeping good credit are two different things.  That’s because the better your credit, the more offers for credit cards and loans you receive.  Get in over your head with credit and miss or pay even one payment late and you could wind up in hot water, since many credit card companies not only hit you with significant late fees, they can also increase your interest rate overnight.

Image courtesy flickr

Credit is a slippery slope – While having bad credit is worse than having no credit, keeping the lure of easy credit from sucking you under is no easy matter.  What’s even worse is that offers for credit cards and loans come down like snow.  You’ll find them in your mailbox and online.  Plus, credit card companies routinely dangle low-interest loans that allow you to turn credit into cash by writing a convenience check that’s included with your monthly statement. Or they offer to let you transfer balances from other cards.  While low and no-interest loans sound like a good way to pare down debt, make sure you read the fine print.  Not only do those low interest rates evaporate in as little as 12-months, but convenience checks come at a cost, since an initiation fee is required.  That doesn’t mean you should never use a convenience check or take advantage of balance transfers.  You just don’t want to wind up in worse financial shape by doing so.

The right way and the wrong way to use credit – I for one just finished paying off a short-term credit card loan that I used to help pay some unexpected bills I had a year ago.  At the time, the 0% interest rate combined with an up-front fee of less than $100 allowed me to leverage several thousand dollars I needed for far less than I would have been able to do at my bank.  Once the crisis was averted, I made sure the debt got paid down by opting to have a set amount automatically taken out of my bank account every month so I’d not only never miss a payment, but would be able to substantially reduce the debt at the same time.  Then I jumped the queue by paying off what remained at the end of the year, a month before a higher interest rate was due to kick in.  As a result, not only did I have access to the money I needed at a rate I could afford, I actually improved my credit score at the same time. 

The wrong way to use credit – Having a credit score above 800 means not only having access to credit, numerous lenders will compete for your business.  The secret to keeping this coveted relationship alive and well is to avoid the temptation to abuse the privilege.  That means only carrying one or two credit cards and managing their use.  It also means cutting back on their use when I you are cash strapped, as I had been when I used the convenience check.  Credit is a two-edged sword that cuts both ways.  Other than medical debt, the number one cause of bankruptcy in the USA is credit card debt.  That’s because the better your credit score, the more credit you will be offered.  The more credit you have, the more you will be tempted to dig a deeper hole in your wallet.  Dig it deep enough and you’ll eventually create a bottomless debt pit from which there is no escape.  As your debt mounts, your creditors can use this to undermine your solvency, since they are able to increase your interest rates when it suits them.  They may also withhold additional credit at their discretion.  When it comes to credit, the secret is to know when to say when.

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Money tree or money pit? – If you don’t want to be held hostage by your creditors, there are a few things you need to know:

      1.      Closing a credit card account hurts your credit.  So too does applying for credit too often.

      2.      Checking your own credit score doesn’t hurt it a bit.  In fact, you should do so at least twice per year.

      3.      Pay all your bills promptly.  And I don’t just mean your credit card bills.  Utility and cellphone bills are also used to determine your score. 

      4.      You don’t have to keep a balance on a credit card to have a good credit score.

      5.      Keep your credit card balances low and pay off any loans or cash advances as quickly as you are able.

      6.      Correct any inaccuracies on your credit report as quickly as possible.

      7.      Consider having recurring bills paid automatically so you’ll never be late with a payment.

      8.      If you do find yourself cash strapped, instead of making a late payment or missing a payment, call your creditors to see if they will either defer a payment for a month or take a partial payment.  This won’t hurt your score at all.

      9.      Resist the urge to apply for too much credit or to max out your credit cards.

Why is maintaining a high credit score crucial? – It should come as no surprise that having access to credit is vital to modern life.   With it, the world is your oyster.  Without it and your world will soon become a very small place indeed.  The secret is never to abuse it, since those with higher credit scores pay far less than those with lower scores.  Just as you wouldn’t think of venturing out in the cold without being properly attired, if you want to avoid the credit card crunch, remember that those who bolster their scores are never left out in the cold.

Diane Tait owns and operates A&B Insurance.  To find out more about how you can save money on insurance, go to her site or fill out the form at right.