When Credit Cards Bite Back

Business On Your Terms
Credit card accounts can cost you a lot if you don’t stay on top of them. Here are pointers for credit management, from The Ultimate Credit Handbook:
*Make sure any account with a large balance has a low fixed rate.
*Find out if any card contains a universal default clause.
*List every card’s penalties, interest rates and annual fees.
*If any of the above aspects are unsuitable, negotiate with the creditor for a better deal or drop the card.
*Read all the fine print if you get a new card.
*Pay bills when they arrive, not when they are due.
*Where possible, pay bills through automatic checking account drafts.

Leaning too much on credit is never a good idea. In recent years, it’s become a worse idea, especially for owner-operators crippled from struggling through the downturn. Be aware that
credit issuers are finding slicker ways to suck you into debt and to make you pay out the exhaust pipe for years to come.

FEES ARE HIGHER. Some credit cards now charge as much as $50 for late payments, says Steve Rhode, co-founder of the non-profit credit counseling group Myvesta and a private money coach whose clients include owner-operators. Some will charge a similar fee if your balance exceeds your credit line, even when the purchases were authorized.

RATES CAN SUDDENLY JUMP. Regardless of your initial rate, the fine print on your credit card agreement leaves the door open for the issuer to raise rates. “Every card can be changed with a 15-day notice,” Rhode says. “I have clients who missed a payment, and all their cards went to 25 percent interest.”

This sleight-of-hand is called universal default. Credit companies check credit reports periodically and act as soon as they see the slightest sign of high risk, such as a late truck payment, bumping rates as high as 30 percent. “It just takes one screw-up,” Rhode says. Having your rates raised hurts your credit record, too.

MINIMUM PAYMENTS ARE MORE SEDUCTIVE. Many creditors used to require 4 percent of the balance as a monthly payment, then drop it to 2 percent if the debtor had trouble with repayment, Rhode says. Now most payments start at 2 percent, leaving no “breathing room” for a smaller payment below 2 percent.

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Furthermore, that smaller payment makes it easier for a borrower to slide by while ignoring a swelling debt balance. Even if you can pay the monthly minimum, it’s a lousy deal when your balance is so big and your rate so high that your payment does little more than cover that month’s interest. “They’ve extended debt out so that it takes 30 or 50 years or more to repay a credit card just using the minimum payment,” Rhode says.

Credit should be a tool, not a crutch. Use it wisely – and sparingly.