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Fool's Rules of Credit Management

By Dayana Yochim

It's the most widely available financial product there is. More than 80% of households have at least one credit card. And if you dare to classify yourself as "average," you have about eight charge cards currently demagnetizing themselves in your wallet.

To bolster your standing as an upstanding citizen of the world of plastic money, follow these Fool's Rules of credit management.

1. A credit card is just that -- a credit card. You have been deemed creditworthy by some entity (Target, Visa, The Puppy Palace) that is willing to let you borrow money for a short period of time. Though your credit limit may add up to $34,538, that is not how much money you have to your name. (See also: "There are still checks in the register, so I must have more money to spend.")

2. Ignore banker's rules on what is an "acceptable" level of debt. Your debt-to-income ratio is the measure of how much debt you carry to how much money (after taxes) you have coming in. In the world of lending, it is acceptable to carry 25% of your income in debt. Consider this example, though:

Total credit card debt:
Total after-tax annual income:
Debt-to-income ratio:
6,437 / 30,000 = 21.4%

A 21.4% debt-to-income ratio is awfully high in our opinion. The ideal number is zero. But at the very least you want to keep your debt -- including car loans -- to 15% or less of your after-tax income.

3. Don't pay by their rules. The "minimum amount due" is cleverly calculated to keep you beholden to The Man for your entire adult life. A $4,500 balance will take 44 years to pay off, even if you don' t put another dime on the card. Oh, and the interest you'll pay on that loan? A cool 17 grand.

4. Watch out for fees. You name it, and lenders have found a way to charge you for it. Of course, there are the obvious fees -- those incurred for late payments, overdrafts, ordering a replacement card, using a "convenience check," or requesting an extra account statement. But there are also some less obvious, newfangled fees -- ones that even the best customers should watch out for. When you transfer a balance -- either to or from your card -- you could get hit with a fee. Wanna talk to a customer service rep instead of a phone automaton? Pony up, please. Decided not to use your card for awhile? Your lender may hit you with an inactivity fee.

5. Play the system. Remember, you're the customer. Do you want a lower interest rate? Sick of paying an annual fee? Uninterested in paying the $35 late payment fee -- and swear that it won't happen again (at least in the next six months)? Just ask! Your lender would rather keep you as a customer than shell out (anywhere from $50 to $150) to acquire a new customer. Use your leverage.

6. When you get into trouble, stop charging. If you find yourself struggling to make even the minimum payments on your credit cards, stop, drop, and roll. (This advice works well if you happen to catch on fire, too.) Stop charging. Drop your spending. And roll your balance over to a credit card that charges a lower interest rate. And then pay it off with fervor. Lather, rinse, repeat.

7. Boost your credit GPA. You have the power to see how you rate in the eyes of the banking world. Your credit report (provided by three major reporting agencies) and your credit score (a three-digit number based on your credit history) is used by lenders to measure your creditworthiness. The good news is that your borrowing transcript is at your fingertips. Check out what's there to make sure that your record is an accurate reflection of your borrowing ways.

8. Carry just what you need. Most people need only one or two credit cards: one for purchases they pay off each month, and another for emergencies (or business purposes). Any more than that is usually overkill.

9. Get some free stuff. If you're going to use it anyways, why not get something back for your trouble? If you consolidate your spending on one card, consider getting a "rewards" card where you earn miles, stuff, or cash back on your spending. Look for a card that will award you stuff you'll actually use. (Cash is usually a good option, eh?) Still, don't let your spending get out of control just so you can get a free golf bag or a few extra airline miles.

10. Teach your children well. A totally cashless society is becoming less futuristic every day. If you have any critters, let them know that the shiny plastic card represents the amount of money you have to spend on Barbies and Barney.


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