Special low teaser rates.
No payments for one year.
On-the-spot credit approval.
It seems that everywhere you turn, a lender offers you credit. And, at this time of year, who couldn't use some extra cash to pay off holiday bills?
According to the California Society of CPAs (www.calcpa.org), in today's economic environment, it's more important than ever to follow sensible strategies for incurring and managing debt. Here are some suggestions to help you through the debt maze.
Distinguish Between Good Debt And Bad Debt
Borrowing for a home or a college education usually makes good financial sense. But unless you're absolutely sure that you can pay the bills in full when they arrive, it makes little sense to use a credit card to pay for things that are consumed quickly, such as restaurant meals or vacation.
Get The Right Loan For The Right Situation
Sometimes all you need is a small amount of quick cash; at other times, you might require a larger loan. A credit card might be a good choice for short-term borrowing needs if you will be able to pay off the balance in a month or two. If you're a homeowner putting an addition on your house, taking out a home equity loan or line of credit makes more sense than using your credit card.
Don't assume that all lenders charge the same interest rates. Annual percentage rates, fees and repayment plans can differ substantially. Web sites like www.bankrate.com allow you to compare credit card rates and features. In any case, before borrowing, be sure you understand the terms of credit, including the interest rate, grace period, minimum finance charges, annual fees and fees associated with late payments, exceeding your credit limit, and cash advances. Read loan documents carefully to be sure you are familiar with the conditions that govern your account such as how to correct billing errors and what to do if your card is lost or stolen.
Know How Much Is Too Much
Carry only one or two major credit cards. Use them sparingly and don't get in over your head. A common rule of thumb is to limit non-mortgage monthly credit payments to 15 percent of your take-home pay. There will always be offers of credit coming your way. It's up to you to set your own limits and determine your borrowing capacity.
Don't Fall Into The Minimum Payment Trap
Low minimum monthly payments are designed to sound attractive to consumers, but they result in paying more in finance charges because the length of time required to pay off a balance increases significantly. If you pay just the minimum on credit card bills, depending on your balance, you could spend years paying off your balance and pay hundreds or thousands of dollars in interest.
Devise A Pay-Down Plan
Okay, you've charged too much and need to pay down your debt -- quickly. The best strategy, say CPAs, is to target the balances with the highest annual percentage rate. You might also consider restructuring your debt to reduce interest costs. One way to do this is to transfer your credit card balances to a lower interest rate card. Alternatively, you might consider consolidating your debt with a home equity loan or line of credit -- but only if you're sure you can handle the payments. Remember, with a home equity loan, you're putting your house on the line.
Protect Your Credit History
Your credit report is based on your payment history. Be sure to make all loan and credit card payments on time. This habit pays off with a good credit history. If, for some reason, you cannot make your monthly payment, contact your creditor to explain the circumstances. Most creditors are willing to work with you.
It's a good idea to periodically check your credit report to verify its accuracy. To get a copy of your report, call one of the three national credit bureaus: Equifax (800-685-1111), Experian (888-397-3742), or Trans Union (800-888-4213). Your credit report will include instructions on what to do if the report contains inaccuracies.
Credit can be a valuable resource when it is used in a responsible manner, say CPAs. That means only borrow when you must, as much as you need, and after carefully weighing your credit options.