In today’s society credit cards are a way of life.  Unfortunately for many people, their credit card debt is consuming and controls their life.  However, with accurate information and self-determination, credit cards can become very effective tools to build a positive credit rating as part of a successful financial fitness plan.

1) CHANGE YOUR MIND

-Decide that you want to be debt free and have no credit card debt.  This includes major credit cards, retail store accounts and gasoline cards.  Be realistic and realize that this will take time and probably will not be easy.  Remind yourself of your long-range financial goals to keep motivated and on track.

-Credit cards are not money, they are convenience loans.  There is no federal limit to the interest rate that credit card companies can charge and many states do not have usury laws, meaning there is no state cap on the interest rate. Eight of the top ten credit card issuers have their charter in states with no usury laws.

-Credit cards are not free, they cost you money.  Many credit cards charge an annual fee; others require a minimum, monthly payment of less than 5% of the account balance.  This can lead to a longer period of time before the account is paid off and subsequently, more interest charges over that time.

2) CHANGE YOUR HABITS

-Do not carry your credit cards.  There will not be an emergency that requires you to have every single credit card with you in your wallet.  This also decreases your chances of being the victim of fraudulent credit card use or identity theft.

-Do not use a credit card for something you do not have the cash for at that moment.  A $500 impulse purchase can cost $625 or more when it finally gets paid off several months later.

-Pay all bills on time, every time.  Especially credit card accounts.  Many companies have included the “Universal Default Policy” in the fine print of their credit card agreement.   This allows them to increase a customer’s interest rate if there are late payments on ANY of the customer’s accounts that are reported to the credit bureaus.  Not just the credit card with their company, ANY other company that reports a late payment can trigger the much higher Universal Default interest rate.

3) MAKE A PLAN

-Stop using the credit cards you have so that you stop accumulating more debt.  If you do not have a budget, make one and stick to it.  Give yourself a certain amount of cash each week and hold yourself accountable to only spending that amount.  Remember your long-term goals are more important to your financial fitness plan than short-term impulses are.

-Contact your credit card companies and request a lower interest rate.  Some online research at sites such as bankrate.com will show what offers the major credit card companies are giving to new customers.  As an established, loyal customer, you can use this information to ask for at least that same rate on your existing accounts.

-Pay off your highest interest rate accounts first.  Pay more than the monthly minimum, even if it is only $5 more.  Do not close credit card accounts when they are paid off.  A major factor in FICO credit scores is the utilization ratio, which is account-balance-to-credit-limit.  Closing accounts decreases the available credit, which makes for a higher ratio and lower scores. 

4) FOLLOW YOUR PLAN

-Continue to use your budget and keep your spending under control.   Once you have eliminated credit card debt, establish your “Smart Fund”.  Start with a goal of at least $1000 in a savings account that can be used for emergencies or unexpected items such as a new car battery or plumbing repair.  Using the Smart Fund instead of a credit card saves money and keeps the credit card debt from returning.  Replenish your Smart Fund as soon as possible.

- Shred the “convenience checks” that credit card companies send to you.  Do not open any new credit card accounts; consumers with long established, good credit do not need more than 3 – 6 open, revolving accounts.

Becoming credit wise and learning how to use credit cards as credit building tools can lead to a better financial future, more money in your pocket and peace of mind.  Contact us today to get your personal Credit Building Plan.