Credit Basics
Your Two Cents - A fiscal self exam
By MEG RICHARDS
The Associated Press
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 lot of people who call us feel like they are just starting to get suffocated by bills," Lewis-Parks said. "These are people with homes and cars and jobs, these are not deadbeats or people trying to use the credit system to their advantage, in a shady way. They want to do the right thing."
Even if you're a well-behaved debtor with a credit score in the 700s, when you're operating in the red, you don't have to wait for a job loss or major illness to put you over the edge. It can be something as simple as a routine medical bill that isn't covered by insurance, or a broken-down car, Lewis-Parks said. You seek a $3,000 hike in your credit limit to cover the expense, other creditors see this as a red flag and raise your rates. Before you know it, you're barely paying your finance charges.
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 hikes and new fees.
Now is not the time to tune out. Credit card companies are cranky. Edgy about conditions in the mortgage market, lenders of consumer credit 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:
If you're charging everything from your morning latte to your late-night taco, and not paying off your balance at the end of the month, you've got some explaining to do.
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.
"Once you're used to not using cash, it's tough to get back into the habit," Lewis-Parks said. "It hurts when you spend cash. You see your bank balance going down. It's so much easier whipping out a credit card."
Most people are aware of their big, fixed expenses, such as housing, utilities and payments for student loans and cars. But few of us can give a detailed accounting of where the rest of our money goes. Using cash is the best way to find out, and it can help you rein in spending.
3) YOUR EMERGENCY FUND IS MADE OF PLASTIC:
With everybody from your sweet Aunt Sue to the federal government in debt up to their eyeballs, it's easy to develop a false sense of security about your financial liabilities. But this is one trapeze act you do not want to perform without a net.
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. With home values slumping, 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."
You can limp along for a while with this strategy. It can help keep you from paying late, which is the biggest ding to your credit score, so you'll look fine on paper. But if you rely on this method on a regular basis, you need help.
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 exactly what you should do when you run into trouble - in fact, it's the first thing you should do. Most lenders, from servicers of student loans and mortgages to credit card companies, have hardship programs, which allow consumers to skip payments without penalty or make smaller payments for a period of time. You may need to provide documentation of your hardship, but usually you can get a break. Acting preemptively is key, however.
"The only time they won't allow it is if a person has been late a lot and hasn't been a good customer," Lewis-Parks said. "Don't wait until circumstances make you a bad customer. They won't want to help you then."
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.
Whatever happens, keep your perspective. People in financial trouble "get depressed, are in denial and think the world is shattering," Lewis Parks said. "But in reality, it can all be fixed."
