Things You'll Need:
- calculator or excel
- recent credit card statement(s)
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Step 1
The most important habit to develop is not missing any payments and not going over your limit. Fail on this first step and you will not only incur exorbitant penalty fees, but your finance charge may increase and your mistakes will appear on your credit report.
If cash is too short to pay your minimum, redirect payments from other places. For instance, the late fee for a gas or electric bill is usually nominal. Paying your cable or cell phone bills may also incur small fees and cause temporary shut-offs, but they are in low priority compared to paying down your credit. -
Step 2
If you consistently pay at least the minimum fee on a card and don't go over the limit, you should call your credit company and ask them to reduce your finance fees. Calling is better than emailing because you can make a personal appeal to someone who might understand a 26% interest rate verses 19% means the difference between failure and survival.
I recommend having 12 consecutive months of paying at least the minimum on your card before requesting an interest rate decrease. Whether or not they deny you, continue to request a decrease every 6 months or once a year, it doesn't hurt to ask.
*interest rates are effected by your credit. As your credit history improves, you have better odds for improving your finance charges. -
Step 3
Put extra cash toward credit cards first. There is a lot of pressure to put money in savings and investments, but you should pay down debt first.
It's fine to have an extra small sum in savings just in case, but if you keep spending savings on toys/clothes/beer/etc. you are much much better off skipping savings and putting the money toward your debt. -
Step 4
Best practice is to have no more than 3 credit cards open at any time. This limits the total debt you could incur, it limits potential issues from identity theft, but 1 or 2 open credit accounts is enough to establish and maintain a credit history.
If you have 2 and want to close both, think twice. Once your credit history is clean, it will be hard for you to establish a new account without any current accounts.
If you have 15 credit cards open, immediately close ones with the highest interest rates. (Hint: Department Store and other store specific cards tend to have the highest rates). Keep 2 or 3 credit cards that have lower interest rates and enough total available credit to keep you afloat. Also, if you have cards with annual fees and cards without, keep the ones without the fee unless the others have much better interest rates. -
Step 5
If you are paying off multiple credit cards, typically you want to put extra payments towards the card with the highest interest rate. Just pay the minimum on the other cards until that card is paid off. If you have multiple cards with the same high rate, first pay down the one with the smallest balance. If you must use your credit while trying to pay off debt, use the card with the lowest interest rate and available funds.
One exception is if you are over your limit on any card, regardless of the interest rate, pay toward that card until it is below the limit.
Another exception is if you have a card with a small balance that you could easily pay off in a month or two. Since each card requires a minimum monthly payment, the fewer cards you are paying on increases your ability to focus paying off one card at a time. -
Step 6
Transfer Balances with CAUTION. The 0% finance charge balance transfer cards offer have fine print rules, but they can work to your advantage.
If you already have a balance on a card and transfer additional amounts to it, your payments are paying down the 0% interest balance first, and then your old balance, which continues to accumulate interest. So do balance transfers onto cards that don't already have balances.
Next, there is a time limit for paying off the transferred balance. When time is up, not only does it start gaining interest, the credit company can retroactively charge you for all the interest the transferred amount was gaining during the 'fee free' period and you may end up with more debt than when you started. Use 0% programs only if you know you can pay off the transferred amount within the time limit, or if you are transferring from a higher interest card to one with a much lower interest.
One more word of caution, there is often a fee with balance transfers. Typical fee is a one time charge of 5% of the amount you are transferring. Do some calculations because the fee may not be worth the trouble. -
Step 7
When getting new cards (after you've paid down debt) avoid cards that charge annual fees. Getting airline miles and points is now a frequent perk with cards, but what's better is cards that offer cash back for your 'points. And finally, your initial interest rate will depend mostly on your credit score, so wait to get new cards until you've significantly improved your credit and maintained it.
Comments
fortunate said
on 9/9/2009 Good tips! Credit cards are good when you know how to use them. Many people are learning this the hard way. I wish more people be like you. 5*