The Secrets to Credit Cards – Diligence

OK, so you cannot live without your credit cards. We get that. We understand that they can make life easier for those who can manage them effectively, but as evidenced by the increasing number of credit card defaults, that may be a lot easier said than done.  Unfortunately, many people are quick to jump on the plastic bandwagon without learning the key secret to credit cards: Diligence.

If you are going to allow credit cards to play a big role in your finances, it is essential that you have a system for managing them and, even more important, to know how they work.  If you have ever seriously studied the fine print of a credit card agreement, you know that there are a lot of moving parts, many of which can change on you at any time.  They’re certainly not the kind of financial tools in which you can just set it and forget it.

If you want to ensure that you do not meet the same fate as millions of credit card defaulters, you need to know what it is you are using, why you are using it, and how much you really need to use it.  Then it is essential to be diligent in your efforts to manage them. Anything less and you could find yourself spinning into the spiral of debt.

What You Need to Watch

Your personal debt limit: Your debt limit is the amount that you could comfortably pay off completely within six months if you had to.  Ultimately, your debt limit shouldn’t be any higher than 20% of your annual income, but that is on the high end.  It’s best to set your own limit, a specific dollar amount, that you cannot exceed and then apply your discipline to stay beneath it.

Minimum monthly payments: Your bank may seem like it is doing you a favor by letting you make such low payments. They’re not. They just want to make more money from you. If you get to the point when you are only able to make a minimum payment, you have too much credit card debt.

Fee mania: Banks are getting much trickier with methods for taking your money.  You already know about late payment fees (can’t fault the bank for that), over limit fees, and replacement card fees. Be on the lookout for backdoor fees such as the ones they charge for cash advances and balance transfers. Or, you could be charged a fee if you don’t carry a balance or make enough charges. And, don’t forget the fees some banks charge when you actually want to speak to a real person on the phone. No kidding!

Also, banks can change their fee structure at any time, so don’t throw out the letter they send outlining the changes. Study it, and then ask questions.  You may be better off by canceling your card and going with someone else.

Waiving fees: Some of the fees mentioned could be waived if you simply ask. If you have a good track record with the bank and you incur a rare late payment or over limit fee, it may only take a nicely posed request over the phone. Bank reps are used to this request and are often happy to oblige their good customers.

Your score: Your score, which changes monthly based on your credit activity, is reviewed regularly by your credit card banks that can then change the terms on you if they don’t like what they see.  Be vigilant of your credit report. You can get one free report a year from the credit report companies. It may be worth it to subscribe to a service that provides monthly updates and credit alerts.

The Bouncing APR: While banks are no longer able to boost your rates as a result of your activity at another bank (Universal Default was banned in 2009), they can still raise rates for about any other reason having to do with your activity with them.  Watch your APR each month.  And, be ready to transfer balances to a card with a lower APR.

Managing your credit cards doesn’t have to be a full time job, if you know what to look for and you don’t lose sight of why and how much you are using them.  The diligence required to stay on top of them and stay out of trouble can be applied in less than a half hour each month which is nothing compared to the time you’ll spend trying unravel a nasty financial mess if you don’t.

This is a guest post by Richard Thomas, contributing writer at www.creditdonkey.com.  Visit CreditDonkey.com to unlock the secrets of credit cards by comparing features, benefits and rewards.

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