Credit Basics
In debt? Time to take fiscal self-exam
By Meg Richards
You may look great on paper and have gleaming credit, but if you’re living paycheck to paycheck, your money life is a lie.
It doesn’t take much to send a happy debtor – one who is making minimum payments and living life to the fullest on maxed-out credit – into a downward spiral, said April Lewis-Parks, director of community outreach at Consolidated Credit Counseling Services.
A few signs you might be in over year head:
1. You don’t look at your bills anymore
The upside of online banking is that your minimum payment is automatically debited on time each month. The downside is that you never bother to look at your bill, which leaves you blissfully unaware of rate increases and new fees.
Now is not the time to tune out. Credit card companies are cranky and are much quicker to raise interest rates and tack on fees than they were just a couple years ago, Lewis-Parks said. They’re also less forgiving when you miss a payment or go over your limit.
If you suddenly notice new fees or a higher interest rate, call and ask for an adjustment. If the first person you talk to can’t help, ask for a supervisor. If your request is turned down, call back in two weeks. Keep trying until you are satisfied, and if you’re not, consider moving your debt to another card with a lower rate.
2. You charge everyday expenses
Paying for everyday things like coffee, meals and groceries with credit while carrying a balance will “put you in a black hole,” said Lewis-Parks. The cure is a cash diet, but it might not be easy.
3. Your emergency fund is made of plastic
There are many reasons why you wouldn’t want a credit card to be your only resource in an emergency, but they all boil down to a lack of control. Lines of credit are not guaranteed – they can be taken away at any time. Furthermore, you might be paying only 6 percent when you tap this resource, but six months later your rate could jump to 21 percent. It’s not up to you.
Using home equity as an emergency cushion can backfire, too. Refinancing is disappearing as a way to eliminate other debt. The answer is simple, if not easy: Your emergency fund should be cash.
4. You pay debts with cash advances
Need proof you have a problem? This is it. Taking cash advances from one credit source to pay another is “like robbing Peter to pay Paul,” Lewis-Parks said. “It doesn’t make any sense, and you’re not paying debt off at all.”
5. You’d rather get a root canal than call your creditors
When your wallet is bare, the last thing you want to do is call a creditor up for a friendly chat.
But this is what you should do when you run into trouble – in fact, it’s the first thing you should do. Most lenders have hardship programs, which allow consumers to skip payments without penalty or make smaller payments for a period of time. Acting pre-emptively is key.
6. Just thinking about this depresses you
If you think you’re overextended, you probably are. Given what’s going on in the lending market these days, it’s a good time to take stock of your debts, cut back on spending and start living a lifestyle that’s a little more toned down.
