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Are you in charge
of your credit cards?
By Libby
Wells • Bankrate.com
You've
heard the maxim men and women often repeat when they talk about
the opposite sex: You can't live with them and you can't live without
them. The same could be said of credit cards.
Those who have tried to rent a car, reserve
a hotel room, book a flight or even write a check know how hard
it is to function unless you have that piece of plastic in your
pocket. But without careful monitoring and wise use, a credit card
can quickly become a burden.
With the year a new year upon us, it's a good
time to take stock and ask: Are my credit card habits helping me
or hindering me?
By reviewing several key points, consumers can
clarify where they stand and be better prepared to take charge of
their cards in 2001, instead of allowing debt to be in charge of
them.
How much do you owe?
The most important yardstick is how much you owe. Stephen Brobeck,
executive director of the Consumer
Federation of America, says consumers should not be shelling
out more than 20 percent of their gross income for credit cards
and installment loans, such as for a car.
"If you earn $40,000 a year, you should not
be paying more than $8,000, excluding your mortgage," he says.
Sunny C. Orr, assistant director of the Center
for Financial Responsibility at Texas Tech University, recommends
no more than 20 percent of your net income.
"And even that is a red-flag zone," she says.
A plan of attack for those who owe more than
one-fifth of their income is to start paying off the cards with
the lowest balances.
"Budget the largest amount possible toward your
smallest debts and keep applying it until you get to the largest,"
Brobeck says.
Some would argue you should pay off the biggest
bills first, but Brobeck says slow progress can be discouraging.
"Psychologically, it's easier to start with the smallest."
The tough thing is that if your bills have mounted
to a point where you can't meet all
your obligations, credit card payments become a low priority. Costs
related to maintaining a home -- such as the mortgage, taxes, insurance
and utilities -- as well as other bills such as car loans, child
support and income tax, must come first.
Ready for credit counseling?
If that's the case, Brobeck urges you to go to a nonprofit
credit-counseling center.
How many cards you have is another indicator
of whether plastic is a burden or a blessing. Depending on which
survey or expert you choose to believe, the average American card
customer has five to 10 plastic rectangles.
Most consumer advocates advise having two --
one for emergencies, and a low-rate card for a credit line. Married
couples might consider separate cards so each has an individual
credit record.
If you surpass those guidelines, it's time to
whittle. "Cut up the cards you aren't using," advises Linda Sherry,
spokeswoman for Consumer Action. "Send them back to the issuers
with a letter.
"And check your credit report to make sure it
says the account was closed at the request of the consumer."
Take a look, too, at what you have been using
your cards for. It's one thing to take advantage of a great sale
on a bed you need and another to pay interest on everyday expenses
such as food, gas and clothes.
Common wisdom is that credit cards should not
be used to buy items you can't pay off in three months.
Brobeck takes a more conservative stance. You
can charge lollipops if you like, as long as you pay them off in
full each month.
"Whatever use allows you to pay down the balance,"
he says. "This is expensive debt."
Pay more than the minimum
For consumers who do carry balances, however, it is important
to pay more than the minimum.
Over the years, card issuers have trimmed monthly
payment requirements from 3 percent to 5 percent of the balance
to between 1.5 percent and 2 percent. As a result, a $3,000 balance
carrying a 15 percent annual percentage rate would take more than
12 years to repay -- and cost nearly $4,000 in interest -- if you
stick with the $45 minimum.
"We abhor the 2 percent monthly payment," Sherry
says. "You cannot get out of debt that way because you are never
paying any principal. Make sure your payment exceeds what the interest
charge is.
"Another thing is if you have that credit life
insurance, which is a rip-off. They collect that first and you're
not even paying off the interest."
Consumers who pay off balances each month still
need to stay on the lookout for changes in card costs. Interest
rates and fees can go up, new fees may be added and grace periods
can be trimmed on very short notice.
That is why it pays to read the small type,
keep card contracts and watch the mail for changes in terms.
"Most consumers don't read that print," says
Brobeck. "That grace period may not be as long as one thinks. If
you don't pay the bill almost immediately, you get hit with a late
fee. The card companies have resorted to an array of tactics to
maximize fee income."
Orr says changing terms is another reason to
have only one or two cards. "Most of us have a lot going on these
days, and it can be hard to keep up with what's going on when you
have a lot of credit cards. Nine times out of 10 those notices look
like junk mail."
Shop for credit card deals
Finally, the consumer who shops for deals -- and doesn't just
accept any card offer that comes along -- will fare better in the
coming year.
Some people choose a card for the wrong reasons.
Cards that offer frequent flier miles, rebates or a picture of your
favorite cartoon character on the front are not necessarily the
smartest pick.
Instead, consumers need to consider the APR,
grace periods, fees and minimum finance charges. You can search
Bankrate.com's
credit card rates to find the best deals.
Calling the issuer and inquiring about costs
and terms before applying for a card can save time and help you
avoid ugly surprises because, as Sherry points out, "You don't get
the agreement until you get the card." Not all costs are disclosed
in the application you receive in the mail.
The short and long of it is that whether a consumer
uses charge cards, or lets the card companies use them, is up to
the individual.
Used wisely, they offer convenience, float time
and more legal protection than cash or debit card transactions.
Says Brobeck, "If one uses them as a charge
card and pays off balances, they are a wonderful product."
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