The opinion piece in The New York Times, “The Credit Card Trap“, highlights one of the leading problems for consumers with credit cards — contract terms that can change on a whim. With insecurity in the interest rates one will be charged from month to month, the fees assessed for the slightest misstep, and the penalties for going over the limit on the credit line can snowball out of control, bankrupting a person in the process.
How to get credit cards back in shape
To get new contract terms under control, effective credit card management is needed. Quickly figure out your stats, and write them down on a list: the total number of credit card lines open, the limits on each, your outstanding debt balance on each, the names of each lender, and the interest rates on each debt account.
The remedy for the change in the terms of a contract will depend in part on how dramatic the change is. For example, if you miss a deadline for payment by one day and the lender explodes your interest rate up to 29 or 30%, then forget the smallest-account snowball method — you need to pay off the debt growing at 30% ASAP. In this case, start with your rough, quick budget, cut out your discretionary expenses, stop making additional contributions to retirement accounts, and turn those funds over to a lump debt reduction payment towards the 30% interest rate card — after the minimum payment is paid on each of the other accounts first. Until that particular account is cleared, or the interest rate on it is adjusted back down, all efforts should be focused on that line of credit, provided the minimum payment is done on the other cards in the process. Thereafter, start making debt elimination contributions to the other credit cards in your list, continuing with the highest interest card first. An alternative is if one knows oneself to be more motivated to pay down debt by clearing accounts quickly, then one can set the order based on the paydown priority starting with the accounts with the smallest outstanding amounts — provided the interest rates have not exploded.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: Credit cards, debt elimination with credit card debt, debt reduction with credit card debt, debt relief, effective credit card management
