Avoiding Credit Card Problems

Carolyn and Tom Leopold of Columbus, Ohio, both hold well-paying, full-time jobs, but they’re living on the edge. Tom is a manager at a plastics factory and Carolyn works at the public library, but since Tom’s regular Saturday overtime was cut, the couple finds it difficult to maintain payments on credit cards and time purchases.

They worry about unexpected emergencies such as medical problems or major car repairs. And, they’re wise enough to realize their small savings account would be quickly depleted if a crisis arose.

Tom and Carolyn are not alone. Millions of people live on the financial edge, not yet candidates for bankruptcy, or legal action, but one crisis away from significant money trouble. Credit difficulties often creep up unnoticed. Are you living on the edge, without even realizing it?

Between them, Tom and Carolyn have 13 credit cards, a combination of major cards, retail store cards and gas cards. Even in good months, when Tom had overtime every Saturday, they paid only minimums on all their credit cards. That was their second mistake. The first mistake was having too many cards.

It’s easy to find yourself in this position. Once you have a card or two, the flood of credit card applications is relentless. Each day’s mail brings another temptation to sign on the dotted line. Though insidious, these offers are legitimate. You could carry 20 different Visa cards, as long as you pay the minimum payment. No one would be the wiser until they request your credit report. Then, you would quickly be out of the running for a mortgage loan or new car. It’s only common sense standing between more credit or throwing the application in the circular file.

Over 1 billion credit cards are currently in use around the U.S. For those issuing cards, there is big competition to get the monthly finance charges and annual fees. In his book, The Secret Life of Money, author Tad Crawford noted, “In 1989, net profits from bank credit card operations reached $4.11 billion, 26 percent of the total bank profits of $15.73 billion for that year. Unlike a century ago when few banks would loan money to consumers, it’s clear, banks today are depending upon profits from credit cards.”

Tom and Carolyn gave in to temptation and signed those applications at least eight or nine times too often. They recently obtained free credit counseling which turned the tide for them. Their goal is eventually to carry only six credit cards in all.

Prudent handling of credit takes common sense, planning and diligence. If you think you might be on the financial edge, begin by counting all your credit cards. If you’re surprised by the number, you have too many. Is there at least one you haven’t used in months? Make an honest assessment of which cards you really need and which accounts you could live without.

Next, gather all your latest credit card statements together. List your interest rate, the total amount you owe and the minimum monthly payment. Review the totals so you know exactly where you stand.

Another option is calling your credit card provider and asking for a lowest possible interest rate. Though they won’t automatically give you their best rate, if you phone and request it, they may.

Be sure to send in your payment as soon as you get your bill. Most issuers use the “average daily balance” method for computing interest. The interest clock is ticking every day, so the sooner your bank receives the payment, the less interest you will pay that month and over the long run.

Pay the highest interest cards first. Make the largest payments you can afford on your highest interest rate card first and just make the minimum payment (use caution here) on your other ones. This will help you pay off your debt more quickly than if you just make larger payments on all your cards.

After paying off one card, make the same payments on another account. if you pay off a department store card on which you were making a $40 monthly payment, add that $40 to another credit card payment. Stick to this plan for as long as it takes to pay off the second card.

There’s a fraudster for every misfortune, including credit woes. If your problems are more serious and you currently have a bad credit rating, beware of the credit repair clinics, also known as credit doctors. Desperate to find a solution to their overwhelming money problems, people fall prey to fix-it frauds, spending hundreds of dollars for little or nothing. Through radio and TV ads, the clinics tout their questionable services.

Kim Donahue, an Education Coordinator for the Consumer Credit Counseling Service in Indiana, points out, “These companies usually charge anywhere between $100-$500. They can have a flat fee or charge on a per item basis. Repairing bad credit has even turned into a work-from-your-home scam.”

The credit repair rip-offs operate by taking advantage of the Fair Credit Reporting Act, a federal law that affirms your right to have reasonable access to your credit report. If you believe there’s a mistake in the report, you can notify the credit reporting agency. In turn, the agency contacts the creditor to find out if the information on file is accurate. If the information is wrong, it’s changed. If correct, it stays on the report. Finally, if the creditor doesn’t respond in 30 days, the agency must automatically drop contested data from the report.

The repair shops flood the credit agency with verification requests, assuming some are bound to fall through the cracks. There is also the chance items may be deleted because creditors didn’t have time to respond. In this bulk of paperwork things can get missed, however if the original information is correct, it will likely get reverified by the creditor the very next month. Keep in mind, anything a credit repair company claims it can do , you can do for yourself.

Good intentions are fine, but discipline and sensible spending habits are still the key. Bringing down the debt will take years, not months. If you need extra help sorting out your finances, consider seeing a credit counselor. The services provided by this nonprofit organization are low-cost or free.

10 warning signs of an approaching credit crunch:

� Do you routinely make the minimum payments on credit cards?

� Have you taken a second job just to keep up with monthly expenses?

� Are you hesitant to discuss credit problems with family or spouse?

� Have you obtained a new loan to cover payments on a previous loan or credit trouble?

� If you lost your job tomorrow would you be in immediate financial trouble?

� Are all your credit cards at their limit?

âÂ?¢ Do you purchase clothing and food with credit, when in the past you’ve used cash?

� Do you find credit card applications hard to resist?

� Have you found yourself fighting boredom by going shopping with credit?

� Do you regularly seek higher credit lines?

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