HotmailSuze Orman: Tips to pay off credit cards
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Situation: The credit card company canceled your account. Do you still have to pay the remaining balance?
Action: Of course you do! When your account is canceled, it is because the credit card company has labeled you a high-risk cardholder. What is being canceled is your ability to use that card in the future. But you are still responsible for every penny of your existing balance.
Situation: Your credit card has been canceled and you are worried it will hurt your FICO score.
Action: Focus on getting the balance paid off; the lower the balance, the less it will damage your FICO score if your card is canceled.
There are two issues that come up when a card is canceled: how it affects your debt-to-credit-limit ratio and what happens to the interest rate on your unpaid balance. In most cases, when a card that has a balance on it has been revoked or canceled, the credit card company will immediately raise your interest rate to about 30 %. When this happens, if you continue to pay only the minimum monthly payment, you may never get out of debt on that card.
Situation: You thought the interest rate on your credit card was fixed at 5%, but it just shot up to 30%!
Action: There is no such thing as a permanent fixed interest rate on your credit card. The rate is fixed only until the credit card issuer decides it isn’t. It’s a marketing ploy. And credit card companies have all sorts of reasons (embedded in the agreement you accepted when you opened the card) to raise your rate.
In 2009, you better believe more and more credit card companies are going to jump to increase a low rate on a credit card if you make them nervous in any way. And just to be clear: An unpaid balance makes them nervous. Paying the minimum makes them nervous. Seeing you fall behind on another debt payment or missing a payment makes them nervous big-time.
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Situation: You have a low-interest-rate credit card you never use — it is just there in case of emergency. Now you’re worried that if you have to use it, your interest rate will go up.
Action: Build a real emergency savings account. Relying on your credit card to bail you out of emergencies is too dangerous in 2009. (See “Action Plan: Saving” for advice on where to open a savings account and “Action Plan: Spending” for action steps on how to come up with more money to put toward a savings fund.)
If you use a credit card for an emergency expense in 2009 and you can’t pay off the balance, you will set off a vicious cycle. An unpaid balance where there once was none makes a credit card company nervous. It can also make other credit card companies you have accounts with nervous. That could cause the credit limits on all your cards to be cut. And if that causes your FICO credit score to drop, then you can expect the interest rate on your credit card to rise. The only solution is to stop thinking of your credit card as a safety net if you run into trouble. The only true safety net is a savings account.
Situation: You have a FICO credit score above 720 but your interest rate just shot up. What’s the best way to pay off your credit card debt?
Action: See if you can apply for a balance transfer to a low-rate card. Because you have a high FICO score, you may be in luck. But lenders aren’t exactly rolling out the welcome mat right now, so this may not be feasible.
Go to cardtrak.com and use the Search tool to shop for balance-transfer offers. The idea is to move your money to a card with a low introductory rate and then push yourself to get the balance paid off before the low rate expires. This can be tricky in 2009. You have the added risk that even if you do everything right with your new card, you could still have the introductory rate rescinded because something out of your control happened on one of your other accounts, such as having your credit limit reduced. In “Action Plan: Spending,” I explain how to reassess your family’s income and expenses to find more money to put toward paying down credit card debt.
Situation: You have a low FICO credit score, but you are current on all your accounts. How should you deal with your debt?
Action: Here’s how:
- Pay the minimum amount due on every card each month. That’s your only shot at keeping your FICO score from falling further. It will also lower the odds that your credit card company will close your account.
- Line up your cards and put the card that charges the highest interest rate at the top of the pile. That’s the card you focus on paying off first. Send in as much money as you can each month to get that balance down to zero.
- Once the first card is paid off, focus on the second card in your pile: the card with the next-highest interest rate.
- Keep up with this system until you have all the cards paid off.
- Of course, the big challenge is finding extra money every month to put toward paying off your credit card debt. In “Action Plan: Spending,” I have suggestions about how to “find” more money in your month by reducing your expenses.
Excerpted from "Suze Orman's 2009 Action Plan" by Suze Orman. Copyright (c) 2008, reprinted with permission from Random House. Download a free copy of Suze's book here.
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