By Shannan Denison, CRPC® Financial Advisor
Do you have credit cards? If yes, you probably either love them or you hate them. You love them if you are diligent about using them regularly and paying them off in full every month leaving no balance and thus not paying double-digit interest rates to the credit card company. If you are in this category, your credit score is probably very good. You get offers of points or cash back rewards. You are regularly solicited to by other credit card companies vying for your business. They send you enticing 0% introductory periods which they know you would never use because you don’t carry balances. This is the category you want to be in because you want the perks associated with being a part of the higher echelon of credit using consumers. If you are already in this category, I encourage you to shop around and make sure you are earning the best kind of rewards for your excellent use of consumer credit. For example, if you love to travel, you may opt for airline miles or something that gives you hotel voucher credit. If you are a business owner, you may want a card that pays you cash back or perhaps one that gives you credit at a store you frequent.
Ironically, if you are the pauper who is making the credit card companies rich every month by carrying high balances with big interest rates, you are the one who is paying for all of the princess’s perks and rewards. Many Americans struggle with debt and are longing to get out of it. Here’s a plan to eradicate your high-interest credit card debt and get you into credit royalty.
Know your credit score and make sure that your information is accurate. You can do this online at CreditKarma.com. This is a free service, and it gives you the reporting from all three credit bureaus which are Experian, Equifax and Trans Union. Not only will this site tell you what your problem items might be but it will also give you recommendations on what credit cards you have a chance of getting approved by and what benefits they offer.
If you find issues such as inaccuracies in your credit report take steps to correct them. You can do this by disputing the information by phone or in writing. The credit card/collection agencies have 30 days to respond once they receive a dispute. I have seen some of these disappear entirely once disputed. If you have something legitimately in collections, contact them and make a plan to pay it off. If you have a 75% or more towards paying it off you have a high likelihood of being able to negotiate a lower payoff with them by paying it off in full. Remember that the collection agencies are buying your debt for pennies on the dollar. They collect whatever they can.
Follow the debt snowball strategy to pay off high-interest credit cards. Here’s how it works: List all of your credit card balances, limits, interest rates and minimum payments. Identify the one with the lowest balance and highest interest rate. Make minimum payments towards all of your cards except the one you identified as the highest interest rate and lowest balance. Once that is paid off in full, use what you were paying monthly and pay down the one with the next lowest balance, etc.
Know the rules of good credit. These include paying all of your bills on time, making sure your credit utilization is under a third of your available credit and not closing accounts once cards are paid in full. Ideally, you are paying off your cards in full every month and have a nice long history. Don’t believe the myth that you don’t need credit and should not be using it all. In our society, everyone has a credit score. If you don’t have any experience with credit then your score cannot be high. In today’s world, you need a credit card to reserve a hotel room, rent a car and make a flight reservation. Know too that not all credit is treated equally. Mortgages and education loans are considered “good debt” because they are investments in your future and can be deductible for tax purposes.