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:
- How to find the best credit card ever.
- Why you shouldn't cancel your credit card.
- How following your lender's rules to pay off your cards is a loser's game.
- Some strategies for managing student loans.
- Our advice on racking up credit card rewards.