Credit Basics

There's a saying among professional money managers that goes something like this: "Managing what you owe is just as important as managing what you own." To that I would add "because if you don't, you're liable to end up not owning anything at all."

This also happens to be the theme of a controversial new film called "Maxed Out," a documentary that has been creating a lot of buzz lately, similar to last year's "An Inconvenient Truth." Instead of global warming, the threat this time involves a spending-addicted middle class America getting buried under a mountain of credit card debt.

Entertainment Weekly called it "the scariest horror film of the season."

The movie portrays banks and credit-card companies as financial predators who prey on middle- and low-income Americans, luring them with cash-back rewards, frequent flyer points, and low initial interest rates, and then sucking them dry once those low come-on interest rates rocket into the kind of double digits only a loan shark can love.

What's really frightening is how accurate this scenario is for a country that has become a nation of debtors.

What's more, those companies whose goal is to perpetuate that debt forever continue to be rewarded. While many financial services companies suffered huge losses during the latest stock market correction when the sub-prime mortgage market tanked, one financial sector actually grew in value.

What was that sector? You guessed it, credit card companies.

That's because nationwide, credit card debt is closing in on the two trillion (with a T) dollar mark. Meanwhile, the personal savings rate in the U.S. has fallen into negative territory, hitting its lowest level since the Great Depression. This is happening because Americans are spending more than and Americans can do this because of credit cards. It's become a vicious cycle feeding off itself.

Congress has belatedly taken note of the situation and has held hearings, rattled swords and threatened action to reign in the biggest offenders. But like anything involving Congress, it's likely to be a long time before anything actually happens -- so it's up to you to take action now to keep your credit card debt from turning into a monster that can't be tamed.

What To Do

So what can you do? Should you just cut up your cards and use cash whenever you buy something? For some, that may be the only answer, especially those for whom using credit cards and amassing debt have become an addiction. And like any addiction, the first step on the road to recovery is to admit you have a problem.

This isn't easy to do. Few people are ready to admit they have a problem with money.

Even Debtors Anonymous, the 12-step program modeled after Alcoholics Anonymous, sometimes has a hard time attracting new members. However, there are more than 500 Debtors Anonymous chapters throughout the U.S. and in 13 other countries. The only requirement to join is a "desire to stop incurring unsecured debt." Basically, that means credit card debt.

But what if you have to rent a car? Car rental companies will only take credit or debit cards unless you're willing to put down a huge cash deposit. And who wants to carry bundles of cash on them? Let's face it, credit cards are a convenience. The key is in how you manage your credit card debt responsibly. So here are ten steps you can take to do just that.

If you simply can't control mounting debt, but you still want to use a card instead of carrying cash, you may want to shift to a debit card. In fact, a recent poll found debit card use has risen quite a bit in the past two years from 21 percent to 30 percent of all store purchases. With a debit card, you won't build up debt because the money is removed from your own account immediately whenever you use your card. The trick with a debit card is keeping close track of the money in your account. Otherwise, you can "max out," and incur bank penalty charges because you don't have the funds to cover those purchases.

Therefore, the next step, which is really your first step in managing your credit card debt, is to know exactly how much you owe in total. Make a list of how much you owe on each credit card along with the rate of interest on each card. Then arrange those cards in order of highest interest rate to lowest.

Once you have your cards in order, pay off the higher interest rate cards first because those are costing you the most money.

Don't wait until the last minute to make your payments. Late payment fees now average $39 per late payment. Also, a late payment could trigger an interest rate penalty pushing your once-attractive low rate up to 25% and in some cases 30 percent if you make even one late payment.

If you think making timely payments is going to be difficult, consider setting up an automatic payment plan that deducts money from your checking account each month.

Keep track of your credit limit. If you go over that limit, you could be penalized with a fee of around $40. This fee continues each month until you're back below your limit.

Not all interest rates are carved in stone. You just may be able to call customer service and ask for a lower interest rate. You might just mention that your mailbox is full of great offers urging you to transfer to other cards offering lower rates. You'd be surprised how often customer service representatives authorize lower interest rates just to keep a customer.