A little known feature of Credit is your credit rating. This is a numerical ranking created by one company (or a small number of companies) and provided to the companies that make loans. Those companies in turn use your credit rating to determine how much they're willing to loan you, and at what interest rate. While, if you've been following the recommendations on this site, it's a good idea to limit your use of credit, it is very hard to avoid using credit in these modern times. Since your credit rating affects your use of credit so greatly it is a good idea to know where you stand, and how to improve your score.
The credit rating process used to operate in secret, but is now a bit more openly performed.
by James H. Dimmitt
As credit card bills begin to stuff our mailboxes, many consumers are faced with the hard reality that they went overboard with their holiday shopping. And for those who don't pay the balance due in full, you'll also wind up paying interest charges. For some people this can be the beginning of the end as they can't see a way to manage the burden of their credit card and other debts.
"Wipe the slate clean", "escape the pressure of credit card debt", "call our bankruptcy hotline for an easy way out" the bankruptcy lawyers proclaim in their slick television commercials. Last year 1.6 million people filed for bankruptcy in the U.S. Is bankruptcy the right answer for your debt problems? Make sure you have the facts before making a decision that has lingering effects.
You look through your daily mail, and an envelope from one of your credit card companies is there. It says something like "Cardmember Account Information Enclosed". Expecting something official (because it looks official), you open it finding a solicitation to spend money, and they've conveniently enclosed some checks. You're offered a low "promotional" and "fixed" interest rate. They suggest you can take a vacation, buy new furniture or a computer, pay your bills, pay other credit card balances, or anything else. Hmmm... you think. Is it advantageous to take the offer, or not?
Well, it depends.
When someone is in debt, deep in debt, near bankruptcy, it becomes a survival issue. The debt is too huge to pay off and events start to get out of control, for example the bank might start threatening to take "your" house away from you. At the same time you probably own a few expensive assets that could be sold, and the money used to pay off the debts. So it can seem like a good shortcut to take.
Speaking for myself, in my debt years I had also acquired some Microsoft stock. This stock came because I worked for a company that ended up being bought by Microsoft, and they (Microsoft) paid off my employee stock options with Microsoft stock. The purchase price was ridiculous, pegged at 15% of the then-current Microsoft stock price, and I held the stock for a couple years as they grew enormously (the late 90's, sigh) and then flattened in 2000 and 2001. It was during that time when I had my debt halfway paid off, and the value of the Microsoft stock approximately equalled the debt, so I pulled the trigger, sold the stock, and paid off a huge chunk of the debt.
If you're in debt, you're in good company. In the U.S. there are a lot of people carrying a staggering amount of credit card debt. And, we also have to remember the debt carried by our governments as well. Obviously since being in debt is a burden that diminishes your life, it would be good and useful to get out of debt and stay out. So let's go over a few strategies and ideas that I've gleaned in my travails with debt.
An important first step is to take stock of your real situation. How much money are you bringing in? What is your available cash after necessary expenses? How can you trim your necessary expenses? Are you able to keep up with the necessary expenses, or are you just digging a deeper hole? Is your spending in control, or outta control? Do you even have any clue how to answer any of these questions?
What's the sound of one hand clapping? Maybe it's the mixed blessing that one gets from credit cards that pay rewards. Let's spend a few moments thinking about the real rewards, before you dive off the deep end lured by "was it that he loves me, or was it the miles".
Having looked at several credit card programs that pay rewards, here's the gist of how they work:
A membership fee in the range of $50 per year
You earn one "point" per dollar spent
You earn some reward whenever you reach a threshold of points earned
Looked at another way, is there a positive use for credit cards? Can they be used well in your life? Or must they be shunned? What about large purchases like cars or houses?
Let's first review the basic principles.
Money is your life force in the material world, and your actions can diminish or amplify that life force
The paths: the way of debt, or the way of amplied life force, they are your choice
available cash = income - necessary expenses
Something interesting I found along the route of paying off my debt is the inner dialog around things. How did I build that debt in the first place? It wasn't just a matter of not paying my bills, but also the things in my life. I had, and still have, a large quantity of possessions.
The thing about possessions is, well, they possess you. They require space to store, they break and need replacement, and there's always new things coming on the market that you gotta have. In other words, not only do you have stuff, but your stuff has needs and requirements. And you end up having to spend money (your life force) to pay for it all, to have a large enough house to store it all, to replace it, and to upgrade everything when the next new thing comes along. And then there's keeping up with the Jones's, because if your buddy down the street gets a 36" widescreen TV, well you gotta go for the 45" model, don't ya?
As I said in the introduction, my wake up call was the debt. I figuratively woke up one day seeing the level of debt I had accumulated. Prior to that awakening my financial knowledge was very weak, and I ignored the details of my financial life. Bills would often go unpaid, not because of lack of money, but simply by ignoring them. As a result the credit card interest rates were high, and my first lesson was in how I had created a trap to limits my choices, so let me explain.
available cash = income - necessary expenses
A very simple equation, yes? A grade school child could calculate this as it's just simple subtraction. Yet I never did the calculation, until that fate-filled day. With $35,000 in credit card debt, at high interest rates, I was paying $600 per month in interest, not the minimum payments but interest, on that debt. That $600 interest per month approximately equalled my "available cash", which meant that no matter how I struggled I was never going to pay it off because the available cash (beyond paying for current expenses plus interest) was effectively $0 per month.