Take "charge" of your credit!

This is a re-post of a post I did some time ago. It is still just as useful today, so I thought I would re-publish it.

I am not an expert by any means on this subject, but I have my fair share of knowledge about money. I hope by sharing the lessons I have learned that perhaps you will gain some benefit from this report. I’m not going to bore you with the basics. I just want to share a few tips that may be helpful.

Cash advances
Taking a cash advance on your credit cards, either by check or by card, is the absolute worst things you can do. Duh… but, not only is the interest outrageous, there is a hidden catch in the fine print. All payments are applied to the lowest interest rate. That means if you owe 5K at 9% and you take a cash advance for 3K at 26% interest, you must pay off the 5K before any money gets applied to the high interest cash advance. Think how fast the 3K at 26% interest will grow before you get even $1 paid to it!!!! Of course, if you have a zero balance prior to getting a cash advance, then this will not affect you.

Borrow from your 401k
You should be able to borrow from your 401k for certain circumstances. I believe the rules vary by the corporate administrator, but typically you can borrow for 3 reasons. 1) First time homebuyer down payment. 2) College expenses. 3) Financial hardship. I fell in the 3rd category when I got caught by the cash advance scheme described above. I borrowed from my 401k to pay off my lower interest rate so I could pay off the cash advance I took. When you borrow from your 401k you are charged interest, but the principal and interest are all paid back to you! I saw this as a win win since I am making interest on my 401k loan, and I can now pay down the high interest cash advance.

Debit cards
What’s the difference between a credit card and a debit card? A credit card allows you to make payments on credit over time, and a debit card deducts the entire purchase from your bank account. Simple, right? Then how come when you use your debit card you always have to select credit or debit? Here is a tip I learned. If I choose “credit” with my debit card, then I am not charged a $1 fee by my bank. If I choose “debit” with my debit card, then I am charged the service fee. Not all banks charge a debit card fee, but there is no good reason I know of to choose “debit” with your debit card. Another tip along the same line, if there is not a button to choose “credit” where it asks for your PIN number, hit “cancel” and then you will be able to choose “credit”. You should never have to enter your PIN number with a debit card as long as you always choose “credit”. After all, it looks like a credit card and works like a credit card, so choose “credit”.

Keep track of your credit
You should always know the status of your credit cards. I keep an Excel spreadsheet showing account name, percent of interest, account balance, available credit and credit limit. I keep them ordered by highest interest to lowest interest amounts. Then month by month on the same spreadsheet I show the balance, charges, interest and payments. I then have a tabulation that shows the difference from last month to the current month balance. This shows me if I am increasing my overall balance or decreasing it. I know, It’s a little anal, but I feel in complete control.

Reduce your debts
Once you have your spreadsheet (or just a list on paper) of your credit card debts, you can choose one of two methods to reduce your debt. One method is to start by paying off the lowest balances first, no matter the interest rate. This will quickly give you less number of debits to pay on, and will allow you to put more amounts towards the larger balances in a short period of time. The other method is to pay off the highest interest rates first, no matter the balances. This will start reducing the amount you are paying in interest monthly which will allow you to put more and more towards your debts.

Credit score
Personally, I hate credit scores; and I feel the consumers are being abused because of them. For example, I have never been late on a payment, but because of my debt/income ratio, some credit card companies raised my interest an additional 6-10%. Why? I have never been late on a payment??? Oh, I get it. If you are at risk of possibly missing a payment, then increasing your interest will almost guarantee you to not be able to afford the payment! I also heard that car insurance rates are going to be determined by your credit score in addition to your driving record! Anyway, the better your credit score, the better interest rate you will receive almost everywhere. Take advantage of the free credit reports (not freecreditreport.com. They automatically enroll you in a credit protection program that you will pay for if you don’t cancel it), available at www.annualcreditreport.com. Once a year, you can get a truly free credit report from the three reporting agencies Equifax, TransUnion and Experian.

Reduce your interest
It never hurts or costs you anything to contact your credit card companies and argue the interest rate down. Some companies refuse to budge, some budge a little and some barter.
I had one company lower my rate from 19% to 14%, but I had to agree to a higher credit line and a cash advance (at the normal apr of 14%). I used the money to pay down other cards that wouldn't budge. I called Discover recently because they raised my rates due to my credit score, not because I have ever been late. I said "I want to either close my account, or get a better rate". They said "sorry, but we don't do that. Your account is now closed". Just like that!

Borrowing and lending on the web
Yes, you can be a lender, just like the banks! You can also borrow money from individuals instead of banks, and at even better interest rates!!! I saw an article recently in Newsweek about a site called Prosper at www.prosper.com. I really don’t like promoting a site on this blog, but I think this site is worth knowing about. I personally took a loan from the site recently at a lower interest rate than my bank would have charged me, and much lower than my credit card interest rates. I used the money to pay down my credit card balances. The only down side is that all loans are 3 year loans, whether you borrow 3K or 25K. That means that your minimum payment is going to be higher than a bank loan for more than 3 years.

I hope you have learned something though this post. If you have other tips to share, please leave a comment so everyone can learn from them.