Credit Card Debt Management

If your credit card accounts are among those being affected by credit limit cutbacks, it may be affecting your FICO score by narrowing your debt-to-credit limit ratio. Creditors typically like to see this ratio at 30% or less, but if your $20,000 credit limit just got halved on a card with a $5,000 balance, your ratio just went from 25% to 50%. It can pose a problem, depending on how high your credit card balance is, but there are some steps you can take that may rectify the issue.

Call and ask. Your credit card issuer may be willing to reinstate your previous credit limit. Chances are good your credit limit reduction was the result of some arbitrary computerized decision, and a real human being may be more sympathetic if you explain your situation. If necessary, ask to speak to a supervisor who may have more bargaining power. The biggest mistake you can make is to simply take your lumps and never ask for mercy, if you really need it.

Transfer your balance. You can open a new credit card, although this will not necessarily be the best thing for your FICO score, which takes into consideration the age of all your credit accounts. You might also shift the balance from one of your existing credit card accounts onto another of your existing credit card accounts where the credit limit is higher. For instance, your card had a $4,000 limit that got sliced to only $2,000. As a result, your $1,000 balance suddenly looks much higher in relation to the limit. If you had another credit card with, say, a $5,000 limit and zero balance, the $1,000 balance would fit much better there. It will probably result in a balance transfer fee and the interest might be higher on the second card, although you might be able to call the $5,000-limit card issuer and negotiate that interest rate. Just tell them you’re considering closing the account, but the interest rate is awfully high for your liking. You may be surprised what could result. Keep in mind that negative consequences are possible from too much balance shifting. You could see an interest rate hike or even a credit limit reduction on your other credit cards.

If your credit has taken a hit, or you haven’t established any credit at all, a secured credit card may be a good solution for rebuilding your good name. It’s a card with a credit limit determined by the amount of your own cash that you load onto it, and the credit limit could possibly eventually be raised by the card issuer by a certain percentage. But carefully consider your options before choosing a secure credit card to ensure you get the right deal for your situation.

Is there an application fee?

You should not have to pay a fee just for applying for the card. However, chances are good that you will have to pay an annual fee, as is standard with secured credit cards. So make sure your card’s annual fee will be reasonable. It truly pays to read the fine print so your card balance isn’t eaten up by fees before you can ever even use it.

Is an insurance policy required?

Just like you shouldn’t have to pay an application fee, you shouldn’t have to purchase payment insurance. Also known as a payment protection plan, this feature covers your payments in the event of death or injury. It’s supposed to be optional, not mandatory, so look for a secured credit card with as few strings attached as possible.

Which credit bureaus does the company report to?

The point of a secured credit card is obviously to build a good credit rating. The only way that can happen is if the credit bureaus are attuned to your progress and how you manage your payments and spending. Make sure your secured credit card issuer will be reporting your payment history to all three credit bureaus, Equifax, TransUnion and Experian. This is important because you never know which credit bureau a lender will use to determine your loan eligibility. Then, the ball is in your court. Buy a few items and pay off the balance in full each month. This will reflect well on your self-control and fiscal responsibility, and enable you to move on to unsecured credit cards with lower interest rates and no annual fee.

So your credit has taken a few dings over the years. Maybe you went through a divorce, got swamped by medical bills or simply forgot (or were unable) to pay a bill or three. You know your FICO score is critical to your financial future, everything from obtaining loans to getting a good auto insurance rate. So what’s a hard-working consumer to do? Don’t run off to the nearest debt consolidation service or credit repair clinic. You can handle this, one step at a time.

Consider a prepaid debit card. A prepaid debit card is stocked with your own money, so it gets you into the mindset of, ‘If you don’t have the money, don’t swipe the card.’ This is the mindset of a responsible credit card holder. Furthermore, some prepaid debit cards have the option of reporting your monthly payments to the credit bureaus to help improve your credit rating over time.

Go shopping. Store credit cards offer some of the most lenient credit approval policies, albeit some of the highest interest rates. Regardless, it’s a good way to get in on the ground floor of the credit world once again. Just use it when you know you’ll be able to pay off the full balance when the bill comes each month (that’s the full balance, NOT just the minimum payment). Otherwise, you’re setting another bad debt trap for yourself.

Pay on time. Paying any bill late is never good, as it can allow your credit card issuer to jack up interest rates - even if the utility bill was late! It is, however, especially damaging to make a loan payment late because this can easily be reported to the credit bureaus as 30 days late, 60 days, and so on. Major ding on your credit report, and it stays with you for about seven years.

Don’t card-hop. Once you’ve been with a company for a while, don’t leave them. Creditors like to see you as a long-term customer, not a fickle “flavor of the week” customer.

Find a good mix. Secured loans are the ones secured by property like cars or houses, i.e. things your creditors can repossess should the loan turn sour. Unsecured debt is essentially credit card debt. That is, unless it’s a secured credit card, secured with your own cash, which is similar to the prepaid debit card concept. Confusing, I know. Creditors like to see a good mix of both secured and unsecured debt on your credit report. It shows you are able to juggle two different types of debt and makes you seem like a responsible consumer.

Adhere to these tips and pack along plenty of patience and perseverance. You’ll be sailing in the good to excellent credit score range in about seven years, the average time the bad stuff starts dropping off your report.