The Savvy Life

Jean Chatsky, a financial expert on the Today show, recently estimated that the typical American family carries about $6,000 in credit card debt. Many more are struggling with $10,000, $20,000 or even $30,000 of staggering debt. Credit cards are not inherently evil. They are convenient and can be a lifesaver in emergencies and life's unexpected mishaps. Yet, when your debt is out of control, your financial security is threatened. Here is how to do it right.

Eliminating Debt

1. First of all, find out where you stand. Make a list of all the credit cards and amounts you owe. Note the interest rates on each, and number them with the highest interest rate first.
   
2. Set financial goals. You can break it into smaller tasks to make it easier.
   
3. Quit adding more debt. The idea is to change your spending habits. Ask yourself: "Is this item a want or a need?"
   
4. Start paying the highest interest rate debt first by paying more than the minimum amount.
   
5. When that amount is paid off, roll over your extra payments onto the next card.
   
6. If you are struggling to pay the minimums, increase your income. You could take a part time job, increase your hours at your current job, sell unwanted furniture, clothing or collectibles. Remember that it is temporary, until you pay off the outstanding balances.
   
7. Keep current on all your bills. Most credit cards can raise your interest rates if you are late on paying anything, even your cable or electric bill.
   
   

Following the Plan

1. Transfer balances. When I was suddenly thrust into the role of being in charge of our finances, the vice president of our credit card told me to forget loyalty and look around for the best deal possible. Even a phone call to your current creditors can net you a lower rate.
   
2. Watch for hidden fees. Whenever you are opening a new account, whether it is to transfer balances or not, make sure there are no huge fees.
   
3. Time is money. Keep track of how long the low interest rate lasts, typically six months to a year. Transfer again before the low rate expires and you're hit with big interest rate hikes.
   
4. Avoid bait and switch scams. Look out for companies that send pre-approved applications for a very low rate, if you qualify. Then they send you a higher rate card, and you might not notice until you get the first outrageous bill.
   
5. Also keep an eye out for shorter billing cycles. One recent application I received had only 20 days in the billing cycle, but the statements are still monthly. This increases the danger of late fees and penalties.
   
6. Don't close that account! Once you've paid off a card, it is tempting to cancel it. Yet don't cancel too many at once. Your available credit line will plummet, and your score could be affected. As long as your balance is paid in full, it is an account in good standing.
   
7. On the other hand, don't go crazy signing up for new credit cards. Too many inquiries in a short time can send up the wrong signal to credit monitors.
   
8. When should you sign up? When the perks outweigh the drawbacks. For instance, I was offered $10 off my purchases if I signed up for a store credit card. In addition, two more $10 off coupons on future purchases were included. I signed up.
   
   

Getting it Right

1. Strengthen your credit score. Your score is based on three things; your ability to pay back debt, your payment history and the ratio of credit available to credit used. You can work on each area to raise your score in three to six months.
   
2. Always pay your bills on time. Doing just this one thing will help your credit score and you will save tons of money on late fees, raising interest rates, and also keep your credit in good standing.
   
3. Keep your ratio low. For example, if you have a total credit line of $20,000 on five credit cards, but you only owe around $5,000, then the ratio is 20%, which is good. But if you only have $10,000 in available credit, your ratio is 50%, which is not so good. Ideally, you should be under 30% for the optimum credit rating.
4. Like it or not, our society is becoming more and more plastic dependent. I tried to live without credit cards for a whole year, and I couldn't do it. Whenever you need to book a hotel or flight, they want a credit card number. If you want to purchase things online, you usually must use a credit card. And finally, it is much more convenient for those times you run out of cash, you're hit with an unexpected bill or a flat tire.
   
5. Also, it hurts your credit score if you don't use credit cards at all. Your account is marked "inactive" and your card can be cancelled. So, what's a person to do?
   
6. Once your debt is paid off, start using credit cards again. Start out slowly, on small purchases.
   
7. The golden rule of using credit cards: pay the balance in full each month. You will avoid all interest payments, late fees, penalties, etc. You may even qualify for rewards on your purchases.
   
8. As you build a history of good credit handling, your credit score will go up and you will enjoy greater opportunities like offers for an attractive mortgage interest rate or an extremely affordable auto loan.

Credit cards can suck you in with the promise of "play now, pay later." Yet when the thrill of instant gratification evaporates, you are left with huge bills and a growing problem. Once you get a handle on credit cards, they can become a boost to your financial security. Follow these tips and you will be well on your way to conquering credit cards.