Are You Over Your Head In Credit Card Debt?
By Tom Holcom
Spring 2008
Using credit or charge cards to pay for purchases is a fact of life in today's economy. Credit cards are convenient and easy to use – so much so that, according to a 2006 Federal Reserve report, the average American household owes more than $2,200 in credit card debt.
But when something is too easy, people sometimes abuse it. Knowing when you're over your head in credit card debt and when to seek help are key steps in your quest for financial freedom.
Credit card solicitations appear in your mailbox, and they look tempting. But then you are charged unexpected fees or discover that your interest rate is not what you anticipated.
First is the legal reality: When you signed up for the card, you were warned in advance. While the letters may have been small or the details buried in pages of disclosures, the credit card company did inform you that it could raise the interest rate, shorten the grace period or unilaterally change the relationship.
Second, you can avoid all those solicitations by calling 1-888-5OPTOUT or going online to www.optoutprescreen.com. While these actions will not completely stop all credit card offers, it can significantly reduce them.
What You Should Look For
Investigate these details before obtaining a credit card:
Variable Rate or APR: The initial rate offered may increase after an introductory period or when the card company increases the “base rate.”
Grace periods: The original disclosure, or periodic updated disclosure, defines the number of days before interest is charged on a new purchase. This helps you know when to pay your bill to avoid extra interest and fees.
Late payments: Beyond basic fees such as those for late or returned payments, the card company can automatically raise your interest rate if you miss or are late on two payments. There is also “universal default” when a late payment on one account leads to an increased interest rate on another account.
Credit limit: If your credit limit is $2,000 and you charge enough during a permanent change of station to raise the total balance to $2,020, you can expect a fee of $10, $20 or more.
What To Do If You’re In Too Deep
If you find yourself in over your head, take steps to gain control of your credit card debt:
Prioritize your payments. The most effective way to pay off your debt depends on your family’s finances and goals.
- If you want to save the most money over time, prioritize your cards by the total amount paid throughout the lifetime of the obligation, including interest, dollar amount and annual fees.
- If you want to lower monthly bills, prioritize them starting with the card with the highest monthly payment.
- If you want to pay the least amount of interest, start with the card with the highest rate.
Create a budget. Once you prioritize your debt payments, make a budget and – most important – stick to it. It is vital that you know where every dollar is going and are able to control excess spending.
Find extra money. After you create a budget that lists all your income and debts, you may be surprised at how much extra money you can find. Cutting out that daily latte or fast-food lunch can add up quickly. Apply that extra money to paying off your cards.
Use the “snowball” technique. For example, say you have one payment of $50 a month and another at $75. Once you pay the $50 bill in full, you roll that $50 into paying off the second bill. Once that second bill is paid off, take that $125 and put it toward another debt. And so on and so on.
Pick up the phone. Call your credit card company before you start having payment problems. It shows you care about paying your debt responsibly, can buy you some time and can even lead to a mutual solution.
Selecting the right credit card is important. Shop around, read the fine print and avoid excess fees. If you need serious help, consult a financial advisor at your military installation or in your community.
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Tom Holcom is president of Pioneer Services, a division of MidCountry Bank, which provides financial services and education exclusively to the military community. For more information, visit www.pioneerservices.com or www.pioneermilitarylending.com.
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Credit Scores And The Military
A number of factors can negatively affect credit and lead to a misleadingly low credit score. Frequent moves or TDY can result in shorter durations at a single location and lead to multiple credit relationships in many cities. Relocation also may lead to a poor credit history as bills get lost in the shuffle of moving. In addition, some retailers and small loan companies in military communities do not report to a credit bureau, so your positive history may go unnoticed.
The truth is, no matter what models or scores are used, military families with the best money management habits will maintain a better chance of obtaining credit and at a lower cost. Follow these suggestions:
Eliminate delinquent payments. Pay bills on time and as agreed, and avoid bankruptcy.
Avoid frequent credit applications. While there are a few exceptions, multiple inquiries by creditors about your credit rating can lower your score.
Reduce credit card balances. Scores are lowered if you’ve borrowed the maximum amount, so pay more than the minimum to pay them off faster.
Choose the right company. Avoid borrowing from companies that do not report your history to credit bureaus.
Review your credit reports annually. Keep close tabs and correct all errors.
Simplify bill paying. An unexpected deployment or extended training can make it easy to forget to pay a bill, so use electronic payment systems when possible.
Source: Pioneer Services, a division of MidCountry Bank
MILITARY
