10 Rules For Managing Credit Cards

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Depending on your spending habits and money management skills, credit cards can be a useful financial tool or a ticket to financial ruin. If you want to be the master of your debt load, Everybody's Money magazine recommends following these key rules:

Take Inventory. How many credit cards do you have? What's the balance and minimum monthly payment on each? What's the total balance? Excluding your mortgage, or monthly housing payment, your debt payments should not exceed 10% to 15% of your monthly take-home pay. If you find that your total balance is more than you thought or can afford, it's time to initiate immediate reductions.

Check out the cost of your credit cards. What's the interest rate on each card? What's the annual fee? Does your card offer a grace period? The grace period is the length of time you have from the statement date until the due date to pay your bill in full before you're charged interest on new purchases. Typically you will have 20 to 30 days. If the card doesn't have a grace period and you carry over a balance or take a cash advance, you're usually charged interest right away.

Get one low-fee or lower-interest card and use it wisely. Too many cards can equal too many shopping sprees and result in excess in debt. Generally, if you never carry a balance, you should look for one card with a low annual fee. If you do carry a balance, search for a card with a lower annual percentage rate (APR). A good source for low-interest rate cards is your credit union. Credit unions historically have lower rates and fees than other financial institutions. When searching for a new card, see if you can transfer balances to your new lower-interest card. This will help you keep closer track of your total credit card debt.

Make the largest monthly payment you can afford. While it's ideal to pay your balance in full each month, it's not always possible. But paying the monthly minimum may do little more than cover accrued interest. If you're paying down a high-interest or high-balance credit card, make the highest payment you can afford, and stick to it. Instead of reducing your monthly payments as your balance declines, keep your payments level and save.

Don't exceed your credit limit. Card issuers may levy a stiff fee if you charge more than your limit. Your credit limit not only includes the dollar amount you charge, but also factors in accruing interest. Use your checkbook register credit tally to keep yourself safely under your credit limit.

Keep track of your purchases. Don't just charge it and forget it. Be aware of what you're spending. One easy way to track your credit card debt is to write down all credit purchases in a checkbook register; simply keep your purchases listed as you would your individual checks. Keep a running total as the month progresses and stop when you've reached your personal limit.

Monitor your credit limit increases. If you're a good customer, credit card companies may reward you by increasing your credit limit. While this may make you feel special, be careful. Increased limits can turn around and bite you when you try to apply for other loans. You may be denied credit if you have too much available credit through your credit cards. Increased limits may also tempt you to spend more; that's the real reason they are provided.

Watch out for teaser rates. Your mailbox may be brimming with unsolicited credit card offers that promise attractive low interest rates. But if you take the time to read the fine print, you'll see that after six months or so the issuer may double the low introductory rate. If you're like some not-so-watchful consumers, you might run up many charges (or transfer balances from other cards) on this new card. When the rates go up, you could find yourself owing a lot of money at a high interest rate.

Be wary of "reward" cards. The irresistible lure of a free round-trip ticket to paradise, or cash back for every dollar you spend may end up costing you more than you think. Before you sign up for a "reward" card, decide what you're hoping to "buy" with the accumulated points and then figure out how much it might cost to pay for it yourself. Now, figure out how much you'll have to charge to earn that "free" item, factor in the interest charges and any annual fee you may be paying for the card. You may find that it's cheaper to stick with the lower-interest rate card and purchase the "rewards" all by yourself.

If you get in over your head, don't bury it in the sand. There are some hardships you just can't avoid that can do some major damage to your debt load. If you quit making your payments your credit report will suffer. Generally, negative information stays on your credit report for seven years—and bankruptcy stays for 10 years—and can affect not only your ability to get credit, but may also limit your ability to get a job or rent an apartment. If you are having trouble making payments contact your creditors before they contact you; alternative payment arrangements may be negotiated.

From gaarc.org