Credit Card Debt Management

Your credit score is immensely important, not only in your finances, but in life. Insurance costs, job prospects, and homeownership are all affected by this three-digit number. Determined by the Fair Isaac Corporation, thus the name FICO, your credit score has tremendous power over your life.

This is why it’s quite important to understand what makes up your credit score and how you can control it. As the pie chart shows, your credit score is roughly 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% types of credit.

1. Payment History

This is fairly self-explanatory — pay your bills on time, every time. Why? Delinquent payments can stay on your credit report up to seven years. If you have problem paying a bill, talk to the lender and update them on how much you can pay and when it will be available. One important note here is that, while everyday bills like utilities won’t go on your credit report, a late payment on one of these can increase your credit card interest rate (i.e., the monthly amount you must pay). Then, you risk falling behind on the credit card payments and your credit report can become marred.

2. Amounts Owed

This category takes into account not only what you owe currently, but what you could possibly owe in the future if you were to max out all your available lines of credit. Essentially, lenders want to know how much you could borrow from all lenders combined, and whether you would be financially able to pay it all back. This speaks directly to your level of risk as a borrower. One solution is to close lines of credit that are paid off and sitting unused, but only if they are newer accounts from within the last three years or so.

3. Length of Credit History

Lenders like to see an established history of not just having credit cards or loans, but having the same accounts with the same lenders over several years. This is why, if you have lines of credit that are paid off and sitting unused, but have been with you quite a while, you should consider keeping them open. Instead of closing it, ask the lender to reduce the available balance to the minimum, then cut up the card and stop using it.

4. New Credit

Try to limit the amount of new credit accounts you open within a short period of time. Also, try to contain credit inquiries (i.e., credit checks run on you for the purpose of obtaining a loan) within a short time period. If you’re shopping for a car or home loan, lenders are going to be checking your credit report a lot. It is gentler on your credit report to get this all out of the way within a couple weeks, as opposed to a couple months.

5. Types of Credit

Revolving credit, like credit cards, should ideally appear on your credit report alongside installment loans, as in a mortgage or car loan. This shows lenders your level of responsibility in handling a variety of debt.

Also, don’t forget to check your credit report often. The best way to get started is to visit AnnualCreditReport.com. A credit check can help correct any reporting errors, as well as identify weak spots in your report and how they might be strengthened.

There’s an art to managing your credit cards. Unfortunately, many people learn through trial and error, which can be extremely expensive and painful. The following are some of the most common mistakes, to perhaps help you avoid the trap of massive debt and skyrocketing interest rates before it’s too late.

1. Paying the minimum - If at all possible, pay more than the minimum. The minimum payments are barely covering interest charges, if at all. Check out Lifehack.org’s 8 Expenses to Cut and How for advice on how to generate more cashflow to throw at credit card debt.

2. Cash advances - This use of a credit card carries the absolute highest interest rate. This is on top of the initial percentage fee charged for the convenience of the cash advance (typically 2 to 4% of the advanced amount). Worst of all, the interest starts accruing immediately, with no grace period.

3. Negotiate your medical bills - Charging your medical costs is an extreme solution for a non-emergency situation. It is better to negotiate payment plans with your medical providers, something they are usually very willing to do.

4. Overestimating credit card rewards - Rewards are great and all, but practically worthless when combined with interest charges. So before you go charging everything in sight in the name of good rewards, make sure you can pay that bill off completely at the end of the month. It’s just good business sense.

5. Burying your head in the sand - Those credit card bills are not going to magically disappear, so do not ignore them. Face them and fight - even the old debts, even the so-called “written-off debt,” can make your life a living nightmare. So negotiate, settle and pay them off quickly in one or two lump sums, and whatever you do - keep very thorough records throughout the process of settling your debt.

Banks.com’s Weamein Yee posted an interesting personal finance article recently on how consumer spending is slowing across all sectors. One of those sectors, of course, is credit cards. Even despite recent reports that American consumers were prioritizing credit card bills above mortgage payments, it seems the credit card industry is not immune to the current economic pressures. Companies are reporting less consumer credit card spending and more late payments.

Credit card companies are now getting more innovative in their marketing schemes. And we’re not talking about free sandwiches to lure college students off campus so they can fill out credit applications. Capital One’s Card Lab has seen much television commercial airtime recently and is being touted “a winner” by Ron Shevlin’s marketing blog.

Choose your own interest rate, rewards, card design, etc. It’s interactive marketing genius. By the time consumers get to the fourth and final step of “review and apply,” they’re already emotionally invested in this deal. They’ve answered the questions, picked the perfect balance of features and rewards and they’ve carefully selected the perfect picture of their kid, pet, spouse, favorite vacation destination, sports team logo, etc. And consumers feel completely secure because they were “in control” from start to finish in this, the first-ever “do-it-yourself” credit card offer. They are wanting that card in a bad way. I’d take it one step further than Ron Shevlin - this is sheer marketing genius.

Shevlin credits Capital One for being notoriously good at the marketing game and, he says, this Card Lab will only sharpen their efforts. It’s all about the actionable data, he writes.

“Analyzing the usage, trends, clickstream, etc. should help Cap One marketers get a really good understanding of who’s looking for cards online, what their preferences are, which features are most popular, and so on. And knowing Cap One, and what good marketers they are, they’ll use this data to develop and refine their offers and marketing programs.”