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The 8 Commandments of Credit

It's the most widely available financial product there is. More than 80% of households have at least one. And if you dare to classify yourself as "average," you've got about eight, several of which you've probably forgotten about.

No, we're not talking about TV sets or black shoes. We're talking about credit cards -- a standard fixture in the average American's financial repertoire. The trick is to keep the cards under control. To do so, follow these Fool's Rules of credit management.

1. A credit card is just that -- a credit card. You have been deemed creditworthy by some entity (Target (NYSE: TGT  ) , Visa, Best Buy (NYSE: BBY  ) , The Puppy Palace, even us Fools) that is willing to let you borrow money for a short period of time. Though your credit limit may add up to $34,538, that is not how much money you should spend. (For similarly misguided assumptions, see: "There are still checks in the register, so I must have more money to spend.")

2. Ignore bankers' rules on what is an "acceptable" level of debt. Your debt-to-income ratio is the measure of how much debt you carry to how much money (after taxes) you have coming in. In the world of lending, it is acceptable to carry 25% of your income in debt. Consider this example, though:

Total credit card debt: $6,437
Total after-tax annual income: $30,000
Debt-to-income ratio: 6,437 / 30,000 = 21.4%

A 21.4% debt-to-income ratio is awfully high, in our opinion. The ideal number is zero. But at the very least, you want to keep your debt -- including car loans -- to 15% or less of your after-tax income.

3. Don't pay by their rules. The "minimum amount due" is cleverly calculated to keep you beholden to The Man for your entire adult life. A $4,500 balance will take 44 years to pay off, even if you don't put another dime on the card. Oh, and the interest you'll pay on that loan? A cool 17 grand. I don't know about you, but that kind of money could cover some pretty impressive impulse purchases.

4. Play the system. Remember, you are the customer. Do you want a lower interest rate? Sick of paying an annual fee? Not interested in paying the $35 late-payment fee -- and swear that it won't happen again (at least in the next six months)? Just ask! Your lender would rather keep you as a customer than shell out (anywhere from $50 to $150) to acquire a new customer. Use your leverage.

5. When you get into trouble, stop charging. If you find yourself struggling to make even the minimum payments on your credit cards, stop, drop, and roll. (This advice works well if you happen to catch on fire, too.) Stop charging. Drop your spending. And roll your balance over to a credit card that charges a lower interest rate. And then pay it off with fervor. Lather, rinse, and repeat.

6. See yourself through others' eyes. You have the power to see how you rate in the eyes of the banking world. Your credit report (provided by three major reporting agencies) and your credit score (a three-digit number that lenders use as your credit GPA) is at your fingertips. Check out what's there to make sure that your record is an accurate reflection of your borrowing ways.

7. Carry just what you need. Most people need only one or two credit cards: one for purchases they pay off each month, and another for emergencies (or business purposes). Any more than that is usually overkill. If you consolidate your spending on one card, consider getting a "rewards" card where you earn miles, stuff, or cash back on your spending.

8. Teach your children well. A totally cashless society is becoming less futuristic every day. If you have any critters, let them know that the shiny plastic card represents the amount of money you have to spend on Barbies and Barney.

Extra credit:

Dayana Yochimhas a lot of old receipts, ticket stubs, three credit cards, and one bank card in her wallet. She owns none of the companies mentioned in this article.


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