July 2018
Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Two common financial concerns that people have today are how to manage credit wisely and how to dig out from under a pile of debt. Sometimes debt distress is a result of unexpected expenses (e.g., car repairs) and sometimes it is "self-inflicted" (i.e., overspending). Regardless of the cause, many people have debt "issues" and could use some advice about credit and debt repayment. Below are ten recommendations to consider:
- Shop Around for Credit - Compare at least three different lenders for loan and credit card terms (e.g., APR (interest) and penalty APR, late fees, grace periods, and rewards programs).
- Negotiate a Discount - Ask lenders for a lower interest rate (e.g., 12% credit card APR instead of 18%) or transfer balances to cards with lower interest rates and fees if the savings exceeds the balance transfer fee.
- Pay Credit Card Bills Promptly - Make prompt payments to avoid interest and late fees and to reduce the average daily balance on which interest is charged.
- Pay More than the Minimum Payment - Double the minimum payment, at the very least, and, ideally, pay credit card bills in full. Doing this can save hundreds (even thousands!) of dollars of interest on outstanding balances and years of payments.
- Match Credit Cards to Debt Repayment Style - Select low-interest credit cards for a revolving balance with partial payments and no-annual fee cards with grace periods for credit card balances paid in full. Resources such as Consumer Action and Bankrate can help you review features of various credit cards.
- Know Your Ratio - Keep consumer debt-to-income ratios at or below 10% to 15% of take-home pay. For example, if someone owes $300 a month for a car loan and $150 for credit card bills and take-home pay is $3,000, the debt-to-income ratio is 15% ($450 divided by $3,000) and further debt should be avoided.
- Check Credit Reports Annually - Request reports from the "Big Three" credit bureaus (Experian, Equifax, and TransUnion) and look for errors and evidence of identity theft. Credit reports are free once a year to consumers upon request. Check the Web site www.annualcreditreport.com for details.
- Get Your Score - Look for a credit card company that provides free credit scores, which are a three-digit number ranging from the 300s (lowest) through the 800s (highest). Free credit scores may also be available when someone is applying for a car loan or mortgage. Otherwise, expect to pay a modest fee.
- Create a Credit Card Inventory- Make a list of credit cards including account numbers and the toll-free number and address of card issuers. Keep this information with financial records in case of loss or theft. Also keep a file of credit card interest and fee disclosure information for future reference.
- Repair a Poor Credit History- Obtain a small secured bank loan or a secured credit card where personal savings is deposited to guarantee the credit line. Repay this debt promptly to build a history of on time payments. Negative information will eventually drop off after 7 years (10 years for bankruptcy).
Rutgers Cooperative Extension has a downloadable Wise Credit Management Quiz for users to self-assess their credit use. The quiz consists of 20 questions about credit-related practices. Research published with data from the quiz indicates a higher score for frequency of checking credit scores versus credit reports. Many creditors today provide free access to credit scores on their customers ' bank statements or password-protected accounts whereas someone must take the time to visit www.annualcreditreport.com to request their free credit report.