Credit Basics
Finance: Taking charge of your credit
by
Linda Stern, Reuters
April 13, 2005
Finance: Taking charge of your credit It's becoming more important than ever for consumers to take control of their credit lives and start paying down debts. Those credit card balances -- topping $9,000 per household, according to CardTrak.com -- are about to become even more expensive to carry than they already are.
Interest rates are on an upward march, raising the cost of that credit. Bankruptcy laws are about to change, making it harder to wipe out debts in the event of a family emergency. And a number of problems have surfaced recently in the credit counseling industry, long thought of as a relief valve for over-indebted consumers. It turns out that many of them -- though not all -- simply compound consumers' problems rather than fix them.
The bottom line? Cut your debt, and do it fast.
Some signs you are headed for trouble:
- If you stay up at night worrying about your debts;
- If you are only paying minimums every month;
- If you're taking cash advances from credit cards to pay bills, or
- If you're spending more than 25 percent of your take-home pay just paying credit card bills.
Even if you're not in serious trouble, there's good reason to pay down debts. Unless
you're in the midst of a family health or unemployment crisis you expect to see
resolved soon, there is no good reason to carry balances on credit cards. They're
just too expensive, and it's not good for a family budget to pay interest on consumable
items like nights out, clothing, and kids' sporting goods.
A good credit counseling agency can help if you aren't able to pay your bills. But
they are best used as a last resort.
The better agencies offer complete financial advice and education; the worst don't
even follow through on their promises to clean up your credit. Many charge hefty
fees, and the ways in which they dole out payments to your creditors can bypass
some creditors or cause your credit score to fall.
But there are other places to learn about credit if you don't need a debt management
program created for you.
If you're at the point of desperation, choose a credit counseling firm -- carefully
-- suggests the National Consumer Law Center, a rights group that has done a lot
of research on these agencies.
Look for an agency that offers a full complement of services, including credit education
and budgeting help. Stay away from agencies that pay their representatives bonuses
or commissions for signing up customers for debt management plans. Find out exactly
what they charge for initial set-up and monthly maintenance fees.
Don't assume that nonprofit status signifies a better agency; some of the worst
offenders have hidden behind that designation, recently drawing Internal Revenue
Service attention to the industry.
If you're not yet at the desperation phase, there is still much you can do to manage
your debts. Here are some starting points.
- First, list all your debts and assign priorities to them, suggests Howard Dvorkin, founder of Consolidated Credit Counseling Services and author of "Credit Hell: How to Dig Out of Debt." If you really can't pay everything, pay your mortgage, your insurance, your car payments and your taxes first. Let doctors, lawyers, other individuals, gas credit cards and magazine subscriptions wait, he says in his book.
- Organize your credit-card debt. If possible, transfer all balances to one low-interest rate card and then pay big chunks on that one card. If that's not possible, put your cards in interest-rate order, and pay minimums on all but the highest rate card. Pay as much as possible on the highest rate card every month, until you burn that balance. Then turn your attention to the next card.
- Consider depleting savings to pay off debts. This is a personal choice and will not work for everyone. But if you're sitting on a rainy day fund that's paying you 2 percent interest, and you're carrying credit card debt at 15 percent interest, you might be better off taking money out of the bank and paying off the card -- as long as you have the discipline to not charge it up again. Use your monthly payments to rebuild the savings. Should that rainy day come before you've replenished the account, you can charge your emergency, and you'll be no worse off than you would have been before.
- Jump-start the whole effort with a massive garage sale, a temporary second job, a sacrificed summer vacation or the decision to downsize your car or cellphone plan.
If your debts have been gaining on you, it will feel great when you turn the tables and start the momentum going in the other direction.
