Don't Do Debt.com

Q&A: Credit Card Use (I)

Q: How many credit cards should I have?

A: The technically correct answer would be one or two. If you have more than one credit card, your obligated to interest and penalty fees on all credit cards in your name. Think of this: You have to pay five credit card bills late one month. A late pay fee = $30. Total = $150 in late fee charges that one month alone. Additionally, your late pays reflect on your credit report (remember late payments erode your credit). The expense of multiple cards can send your money spiralling out of control in little time.

It depends on why you are considering a credit card. If you're hoping a credit card will help build your credit, this strategy can quickly backfire.

Credit report (II)

Q: How do I get bad credit?

A: First thing's first. Credit score: FICO scores range from 400-800. If you have no credit, you're somewhere in the middle. Your job is to take responsible measures to increase your credit score. Timeliness is godliness in the world of credit and paying every loan (traditional or a credit card, for example) is imperative. Late payments erode your credit. When it comes to credit reports, there are 3 factors to consider: Good credit, debt to income ratio, bad credit.

The Minimum Payment

One common misconception about the minimum payment: Credit card companies do little in the way of encouraging consumers to pay more than the minimum. The minimum payment is a small percentage of your balance, typically 2-3% and is about 90% interest and 10% balance. Paying only the minimum little to decrease your balance and the overall balance you pay interest on. A higher balance costs you more money in interest. Paying only the minimum prolongs the life of your debt-load.

Paying your minimum on time is certainly critical (timeliness is godliness in the world of credit cards). If you're a chronic late payer or you pay bills haphazardly (every two months was once my strategy), you risk penalties in higher interest rates that cost hundreds or thousands of dollars. Higher interest rates added to your balance can double or triple your minimum payments. Unpredictable minimum payments make it difficult to budget and save money and increase the difficulty to get out of debt.

Cost of Credit Cards

Think of these costs for the simple privilege of using a credit card(s) (AKA: The cost of being in debt):

If $1,000 balance at 10% APR, $100/year.
If $2,000 balance at 10% APR, $200/year.
If $5,000 balance at 10% APR, $500/year.
If $20,000 balance at 10% APR, $2,000/year.

Typical interest rates range from 8% to 14.9%, with penalty increases that can send your APR into 23-26% range.

Let's double those costs:

If $1,000 balance at 20% APR, $200/year.
If $2,000 balance at 20% APR, $400/year.
If $5,000 balance at 20% APR, $1000/year.
If $20,000 balance at 20% APR, $4,000/year.

Imagine the cost of multiple credit cards. Pretty pricey food for thought.

Credit Cards & Co-Branding Campaigns

Imagine the college of your child's choice making a profit from your child's debt-load. Can't imagine it? When a person opens a credit card in conjunction with an academic institution, their favorite retailer or otherwise, everyone profits except the cardholder.

An article in the Sunday, 10.19.03 edition of The Charlotte Observer asks, "What's Next? Krispy Creme Credit cards?" Co-branding was all the rage from 1992-99 but proved unprofitable to the banks creating these partnerships/campaigns. The co-branding/partnership is, however, back in style.

Debt Over Lunch

Today's lunch with a dear friend led to conversation about everything under the sun and eventually wound around to my favorite subject: money. She recently switched jobs and and now earns substantially more money than her last job. In spite of the increase in salary, she says she and her fiance can't seem to save money. "Money just seems to go and we still live paycheck to paycheck with nothing saved," she confessed.

Their situation is not unusaul and many people identify with this very struggle. She's at a prescious crossroad: she can either take control of her money now and start planning how to get ahead or she can continue along the same broken path.

Credit Score Ingredients: Mix of Success

If you your credit was pulled today, do you know how you'd stand? Good credit? Bad credit? How's your debt to income ratio? Do you know what's bringing your credit down or pushing it up? A report recently across my radar suggests that a FICO score is comprised of the following:

10% Type of credit in use
10% New Credit
15% Length of Credit History
30% Amounts Owed
35% Payment History

Payment history is highest in the mix: Late payments erode your credit score. Period.

Why "don't do debt"?

Inevitably at some point in all of our lives, we wake up and wish, wish, wish we had more money. This becomes especially relevant when a person's money is committed to high interest credit cards because this sort of debt eats away at extra cash, makes it difficult to have "extra" money after the bills get paid, and the idea of saving money when you're in debt is pretty much tossed out the window.

As I've mentioned, debt is not always a bad thing, but all people deserve (and I'd go so far as to say entitled to) the foresight that oneday you'll need more money to do what you want to do and/or create. Financing your dreams, your life become extremely difficult when your money is already spent.

Basic money skills for everyone

Preserve, protect and make the most of money: Every person should have these very basic skills but no one teaches this information. In fact, most people are lucky if they are given a short class in junior high or high school on balancing a check book. Don't get me wrong, this is an important skill to have, but what good is it if a person is not taught where the money that's needed to balance the checkbook comes from.

It's time for the younger generation to explore where money comes from, how much it costs to live, how the bills get paid for, how a paycheck breaks down and what to do with your money when you start earning it. To get ahead in life, everyone should have basic money skills.

A Call For Submissions

Every day I receive phone calls from distressed individuals desperately seeking answers about debt elimination solutions. Personally, I am leery of some of the varied and sordid offers I have come across. Some companies claim they can get you out of debt completely based on loopholes in the law. Others promote that eliminating errors and writing letter after letter is the sure-fire solution to repairing your credit. I remain doubtful and suspicious in spite of the number of companies popping up and offering these services. The cost factor is certainly one big concern. Another is the lack of feedback I've heard from people who've used these services.

If you've worked with any of the many debt elimination companies, please share your experiences: Good, bad or ugly? Send your story, experience, the outcome and/or your thoughts on these programs to [email protected]. Thanks!