“I like having the dough to come and go as I please.”
All You Need To Know
To come and go as you please is our goal and you can’t with a ton of credit card debt. So we will pay it off. First we have to lower that rate—Google “low interest credit cards” and find the lowest but don’t get that card. Call your existing credit card companies, tell them the rate you can get and ask them to lower their rate to match. If they want you they will do it. Now throw all the cards, except one for an emergency, in a drawer and lock it. Pay and pay and pay, starting with the most expensive card first and think about the 31% return you are getting.
Be Like Bruce
You gotta love Bruce. If I’m flipping the channels and hit Die Hard I’m done for the evening. And I don’t know who tossed who but if a guy can get over Demi Moore, well, enough said. But more importantly, Bruce doesn’t have credit card debt. But, you say, Bruce has a lot of money even after making a bunch of dud movies but so what, I bet Bruce never had credit card debt because he wants, no demands, to “come and go as I please.” That’s where we’re going.
How do we get rid of it? Pay it off. Go into financial celibacy and grind it out. Every cent needs to go to those bad boys at Citibank. End of chapter.
Ok, not really. We will, reluctantly, go into and explain FICO scores and techniques to consolidate and reduce the amount of credit card debt you have to pay. But once out, we are out. You’ll be like the ex-junkie, ex-smoker, ex-alcoholic. A charter member of Credit Cards Anonymous. First, for FICO.
America is obsessed with FICO scores. FICO scores measure creditworthiness on a scale from 300 to 850 with, like bowling but unlike golf and cholesterol, the higher the score the better. For the trivia buffs out there FICO does not stand for the Federal Insurance Company but for the Fair Issac Corporation, the guys who came up with this monstrosity.
I don’t know who the Fair Issac is, or was, but the important thing to remember is that FICO is important when 1) you buy a house 2) finance a car 3) get insurance. Hopefully, these things will be in the distant future and you have plenty of time to fix your score so it will be pristine when you need it. Financial planners will jump up and down about needing a great FICO score NOW so you can get a great rate on your new borrowings. Let’s look at this logic a bit more closely. I need a great FICO score so I can borrow more which will reduce my FICO score and limit my future borrowing or increase the interest rate I pay. The hamster just keeps running around in that wheel. You need a good FICO score and we will get one but you don’t need it now because you are not buying a house and hopefully you are going to make that car last for another year or two or, better yet, have no car at all. The impact of a FICO score on the cost of insurance is not enough to really worry about right now.
A good FICO score is not hard to get if you do the right thing. FICO scores are based on the following items and the following percentages in order of importance.
Paying Bills On Time 35%
Credit Card Balance
As a % of Total Credit Line 30%
Length of Credit History 15%
New Accounts and Recent
Applications for Credit 10%
Credit Card and Loan Mix 10%
Is it just me or is this stuff all sounding like things your mother told you to do? Pay bills on time. Wow. Credit card balance as a percentage of total credit line is a little more complicated but, as usual, not much. If you have a credit line of $100 and you have credit card debt of $98 the smart financial analyst at Bank of America is going to say enough is enough and ding your FICO.
Length of credit history. Again, a little complicated but not much as the rationale is the more we know about you, the easier the decision to lend or not. A person with five years of on-time payments is a lot easier to lend to than somebody straight out of school who was late on the electricity payment five out of six times. New accounts is self-evident so don’t open an account every time somebody at the Gap offers you 10% off at the checkout counter if you apply for a card. The last one is the most complex—for some reason card companies like you to have more debt than just credit cards. They want car loans and student loans along with credit card debt because it tells them just how much they can lend to you before you go over the edge into bankruptcy and then they don’t get paid-ever.
That’s it, I can’t stand to even think about FICO anymore except to improve it you really only have to 1) pay your bills on time all the time, 2) not max out your credit line (your credit line is a prominent number on your monthly bill so don’t say you don’t know it) 3) keep the cards you have which will maintain the length of your history. (Don’t cancel any cards, just take one to use in an emergency and put the others in a drawer, preferably locked.) 4) do not apply for any new cards. Forget about the credit card/other loan mix. It is what it is and is only 10% of the score anyway. Do 1 through 4 and your FICO score will be just where you want it when you finally really need it.
I can see the light at the end of tunnel. Almost through with the subject of credit cards. One last issue—what can you do to pay the least amount of interest while paying down and eliminating the balance? That is the question. The question is not how can I get the best deal on an interest rate so I can borrow more.
The answer to the original question is go shopping. Google “low interest rate credit cards” and stand back and then read the fine print before applying. Then, call your existing credit card company and tell them the rate you can get. They may look at your balance and FICO score and say good riddance. If they want to keep you, they will lower their rate. They will also put a little black mark next to your name as a troublemaker but you’ll probably get the rate. If not, transfer your balance to a cheaper card but be careful of 1) what the low rate applies to as most apply only to the transfer amount and not new purchases and 2) any hidden fees which are usually linked to late payments and late is defined here in minutes, not days. And sometimes there are fees to do the transfers.
Finally, never pay an annual fee for a credit card. Forget the miles unless you travel for business 52 weeks out of the year and, for some reason, want more. Google “no fee cards” and millions, most with some kind of reward program, will pop up.
Ok, I can’t take it anymore. There is more little stuff to know but our goal is to get off financial crack, not make it cheaper. Pay your bills on time, pay off your credit cards ASAP, and improve your FICO by doing so. FICO is important so get it in shape for when you will really need it in a few years.