Credit Card Debt Management

Now that’s what I’m talking about! A credit card that actually gives you money back! Make six on-time monthly payments in a row to the new Discover Motiva credit card and they’ll pay you the next month’s interest amount in the form of a cashback reward known as the Pay-On-Time Bonus.

Pretty sweet deal, right? So the people who pay on time will finally receive more cash rewards than the sloppy payers of the world. Motiva cardholders can also receive cashback bonuses through 80 partnering businesses like Chili’s restaurant, Gap and Kohl’s clothing stores and Bed, Bath and Beyond home decor store. Rewards are doubled when the card is used to purchase e-certificates or gift cards at those stores.

But wait - that’s not all! Balance transfers are only 3.9 percent APR through January 2010 and new purchases are 3.9 percent APR through March 2008, with the rates increasing to 13.99 percent thereafter.

This card is pretty enticing. As loyal blog readers know, I have been seeking a good balance transfer offer lately. No annual fees, 3-percent balance transfer fee … the interest rate could be lower (like, zero) but it lasts until January 2010. Plus, I pay on time and like the idea of getting rewarded for that.

But then I check the fine print, and in creeps that nasty little Universal Default Policy. Sure, it’s couched with vague lingo like “default rate” and “general credit history,” but it essentially means that if they learn you missed a payment with another company, like the electric company, they will penalize you with a higher interest rate.
Capitol One has reportedly done away with the policy, which has recently come under fire from congress. Discover Motiva still has the policy - and for that reason, on principle alone, I’ve lost all motivation to look into it.

So it’s back to school time and that means the credit card issuers are clicking their heels in delight.

College students are one of the most highly sought-after demographics. There is a general belief that credit cards are good for them because of the ever-present threat of an emergency during college life, what with traveling and limited income. There is also a pressure to build credit history.

A Nellie Mae study a few years ago found that 78% of undergraduates ages 18 to 25 have at least one credit card. They carried an average balance of $2,748. Nellie Mae also found that of the 78% of undergraduates with a card; 32% have four or more cards; 13% have credit card debt between $3000-$7000; and 9% have credit card debt greater than $7,000.

Perks like a free t-shirt entice many college students to apply for cards they never would have considered previously.

It was not until two years after college graduation that I checked my credit report for the first time (I opened my first student card my sophomore year, so I thought). I was alarmed to see on my credit report a card I did not remember opening and had never, to my knowledge, possessed. Fortunately, the card had a zero balance and was promptly cancelled.

Then I remembered: Freshman year, outside the cafeteria door, those really cool t-shirts, everybody was doing it. I never even received the card, but there it was on my credit report! I sure did enjoy that t-shirt … I think I still have it today.

The point is, make sure your college student understands the ABC’s of credit before heading off to the university:

1) Debit cards can do all the same things as credit cards.

2) Don’t follow the lemmings! Shop and compare credit card offers to find the lowest interest rate and a decent credit limit. Too low, and it’s easy to max out. Too high, and you risk getting swallowed by debt.

3) Know how to read your bill. Be fully aware of late payment fees, cash advance fees and interest rate accrual and increases.

The average college graduate exits with over $20,000 in student loan debt. Help your college student use credit responsibly to avoid adding too much more debt to the pile.

For a financial nerd like myself, there is little more exciting and reassuring than seeing a massive mound of debt disappearing. In our instant gratification society, the patience and dedication required to achieve this is virtually unheard of. In fact, it’s much more in keeping with the culture to swipe the plastic and get whatever we want instantly.

Credit certainly has its place, but when abused - and many do abuse it - you will find your suffocating self wanting out, and fast.

Here’s how:

Make a plan. Identify on paper where your main expenses are. If it is things like dining out, traveling or shopping, those are easy to fix. It will require that ugly word: self-control.

If your debt-to-income ratio is simply too high, allowing only a little extra in the budget for basic life necessities, that is a disaster waiting to happen. Pick up an extra job, sell something big or do whatever you have to do to open up a little breathing room. Do it yesterday, because life will throw you curves and you want to be ready.

Know your interest rate on all loans and credit cards. Try to negotiate a lower rate, particularly if you are a longtime customer who has paid on time. If they don’t work with you, threaten to transfer the balance to their competitor’s low-interest intro offer. You know you get a dozen of those credit card offers each day. It may just be time to use one.

Try to pay more than just the minimum if at all possible, even if it’s just one card. It is ultimately important to keep paying at least the minimum on all your debts. You should also try very hard to save up a financial cushion of at least $500 to $1,000. It will not only help you in time of emergency need, it will also offer psychological reassurance as you battle your mound of debt.

Debt in this country is at epidemic proportions. You are not alone, but you can manage credit card debt. It is by no means a pleasant, quick or easy process, but it can be done — and when it is, be sure to proceed with caution in all your future credit dealings. Don’t abuse it!