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60-Second Guide to Managing Your Credit

Credit cards are the most widely available financial product around. More than 80% of households have at least one. And if you dare to classify yourself as "average," you have about eight charge cards currently demagnetizing themselves in your wallet.

To bolster your status as an upstanding citizen of the world of plastic-powered purchasing, spend a minute learning how to manage your credit.

0:60: How much is enough?
Your debt-to-income ratio measures how much debt you carry, versus 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.

0:53: 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 at the minimum rate, even if you don't put another dime on the card. Oh, and the interest you'll pay on that loan? A cool $17,000.

0:46: Watch out for fees
You name it, and lenders have found a way to charge you for it. Of course, there are the obvious fees -- those incurred for late payments, overdrafts, ordering a replacement card, using a "convenience check," or requesting an extra account statement. But there are also some less obvious, newfangled fees -- ones that even the best customers should beware. When you transfer a balance -- either to or from your card -- you could get hit with a fee. Wanna talk to a customer service rep instead of a phone automaton? Pony up, please. Decided not to use your card for awhile? Your lender may hit you with an inactivity fee.

0:35: Play the system
Remember, you're the customer. Do you want a lower interest rate? Sick of paying an annual fee? Uninterested 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.

0:26: In 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. Then pay it off with fervor. Lather, rinse, repeat.

0:23: Boost your credit GPA
You have the power to see how you rate in the eyes of the banking world. Lenders use your credit report (provided by three major reporting agencies) and your credit score (a three-digit number based on your credit history) to measure your creditworthiness. The good news is that your borrowing transcript is at your fingertips. Check out what's there to make sure that your record accurately reflects your credit habits.

0:18: 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.

0:13: Get some free stuff
If you're going to use your card anyway, why not get something back for your trouble? If you consolidate your spending on one card, consider getting a "rewards" card where you earn miles, stuff, or cash back on your spending. Look for a card that will award you stuff you'll actually use. (Cash is usually a good option, eh?) Still, don't let your spending get out of control just to earn a free golf bag or a few extra airline miles.

0:05: 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.

Got another minute?
For more on managing your credit, read about:


Read/Post Comments (7) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 12, 2010, at 11:06 PM, SUPERMANSTOCKS wrote:

    Good rules to live by!

  • Report this Comment On July 27, 2010, at 11:06 AM, marilynmorado wrote:

    thanks for the tips, I understand we need credit in order to do most things like get a loan or etc but credit cards are really the "devil" people misuse them more than not my friend got into debt b/c she has a shopping problem she buys what she sees and it added up fast she had to use http://www.debtguru.com to get her debt cleared she was debt free in 3 years but it took her under a year to get in debt I myself have yet to get credit I have no credit which is just as bad these days but i prefer that way for now

  • Report this Comment On October 08, 2010, at 7:37 AM, ggg1234 wrote:
  • Report this Comment On October 08, 2010, at 7:38 AM, ggg1234 wrote:

    Very useful article. In my experience credit cards are good for short term money management, but can be deadly for long term financial stability. Found a really useful site talking about dealing with UK based credit card debt and your legal rights- http://www.debt-line.org.uk/credit-cards

  • Report this Comment On November 08, 2011, at 1:41 PM, Dresden83 wrote:

    The 0:53 option is just sad when it comes to consumers, isn't it? This is why they passed the law 6 months ago which now require the creditors to show the estimated payoff duration on the actual statements. Consumers need to understand that credit card companies are in this business, to make money. Although the interest rate may be 15% or higher, it's compound interest. This results in the consumer paying 50 to even 100% over the balance initially used. :-( Dresden @ http://www.consolidate-debts.com

  • Report this Comment On October 13, 2012, at 1:00 PM, ruthadorno wrote:

    Reducing credit card debt in order to stay current is often a great strategy. Golden Financial Services explains how this can be done. Read more on reducing credit card debt http://nomorecreditcards.com/reduce-debt-high-credit-cards/ and staying current on your mortgage payment.

  • Report this Comment On February 22, 2013, at 7:58 PM, ginopasquali wrote:

    this all used to aply to me , then i started to work at the same bank where i had my debt and you wont believe what i found out,,, its incredeble that they WANT you to be in red with them so they have moore control ,, wel after learning a lot working at the bank i found the way to get out of this credit card trap,, i wrote it all in this report that i want you to read so you too can beat them, for FREE, http://tinyurl.com/credmanager becouse its not fair to be pressured by the big man i know i was there and it feels a lot nicer not having credit card debts... check it out

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