Not-So-Magic Bullets

Wow.  Now, this is a great article.  It is jam-packed with some really great information.  Let me begin this article with a word of encouragement; credit card debt is manageable.  There is a solution for you.  You need a plan, and enough focus and determination to stick to it.  I hope that I can give you a little help within these paragraphs.

Not so long ago, I was overwhelmed by credit card debt.  I struggled to just to make the minimum payments, and I wondered why the balances never seemed to get any lower.  The real kick in the pants was that I did not have much to show for it.  I had a set of home speakers, a couple of pieces of Ikea furniture, and a Bowflex, but not much else.  Most of those purchases I made impulsively; I could have made a plan, budgeted a few dollars a month for saving, and bought that stuff with cash.  I cannot ignore the fact that I made a habit of regular discretionary spending.  Eating out, rounds of drinks for my friends, buying, renting, and going out to movies - all courtesy of the all-powerful plastic.  I could have had all of these things paid for with the cash I could have saved on credit card payments.  The use of credit cards allows for immediate gratification, and that is the trap that snared me.

Eventually, the constant debt grew to an intolerable level.  It became substantial enough that I had to curtail the unnecessary spending.  My credit limits were near their end, as were my wits.  I did not know where to turn for advice, so I spent hours upon hours talking to credit counselors, asking trusted friends, and reading volumes of literature.  No one seemed to have the magic bullet that could vanquish my credit card debt with one shot.  At great length, I stumbled upon a regular bullet that helped me at least put a few holes in that credit card debt.  Additionally, I found a couple of "bullets" that can assist in building a positive credit rating.

Bullet #1) Ask for a better interest rate.  That\'s right, just ask.  Most credit card accounts are eligible for review every quarter or every six months, depending on the company.  Get into the habit of calling your credit card company or companies twice a year and asking them to reduce your Annual Percentage Rate, or APR.  Have a specific number in mind; it should be a significant reduction (especially if you have not previously had a rate reduction), but within reason.  For example, when I first began my war on debt, I had a card that had a horrendous 26.24% APR.  (I know, I know - believe me, I am ashamed.)  Here is the paraphrased transcript of the phone conversation I had with the representative.

Credit Card Guy: Good evening, Sir, how can I assist you tonight?
Me: I was calling to see if you could lower the interest rate on my card.

CCG: Let me access your account.  Okay, Sir, I see your account is eligible for a rate reduction.  We can lower your rate from 26.24% down to 22.74%.

Me: Hmm… I was really looking for something like 19.99%.

CCG: Hold on, Sir.  Okay, I don\'t have 19.99% available for you at this time, but I can offer you 20.99%.

Me: Woohoo!  I mean, uh, yes, that will be acceptable.  Thank you.

You see, right off the bat, they were ready to drop my interest rate 3.5%!  I pushed a little harder and they gave a little more.  The result was a 20% drop in the Annual Percentage Rate, and about $25 off my monthly minimum payments.

Bullet #2) Ask for a higher credit limit.  I know what you are thinking.  "This guy must be out of his gourd!  Credit cards got me into this situation in the first place, and now he wants me to get more credit?"

Yes, but I do not want you to use the extra credit.  A higher credit limit will not lower your monthly payments, nor will it help you pay off your existing debt any faster.  The benefit is that the lower the ratio of your credit balance to your total available credit, the better your credit score.  If you are not worried about your credit score right now, you probably will be at some point in the future.

The script begins just as if you were asking about lowering your APR.  Occasionally, your credit card company may agree to raise your limit based on nothing more than your relationship with them.  If they need to do a "hard pull" on your credit to determine if you are eligible for a credit limit increase, they will tell you.  When a credit card company tells you that they need to pull your credit, they are saying that you are not likely to get the increase unless your overall credit is in pretty good shape.  If your credit situation is not very pretty, ask the representative if there is anything, even a small increase, which they could do based on your history with them.  If they cannot, then politely decline as if it was their idea in the first place.

When I mention that a low balance to limit ratio improves overall credit ratings, I am often asked if it makes sense to apply to one or more of the dozens of new credit card offers most people receive.  The short answer is "no".  Increasing the limit on existing cards will improve the credit ratio without adding potentially another monthly bill.  It is true that if you do not use the card, you will not owe anything (unless there is an annual fee); but unused credit does not have the same degree of effect on your credit score.  Applying for a new card also guarantees a hard pull on your credit, whereas asking your existing creditors for a balance increase does not.  It simply makes more sense to strengthen relationships you already have, than to spread yourself thin trying to create new ones.

One more caveat I must share concerns the ever-present, ever-tempting balance transfer offer.  An offer for a new credit card, replete with balance transfers, a high limit, and an eye-poppingly low Annual Percentage Rate can be very difficult to pass up.  Remember, though, "pre-approved" is a far cry from "approved".  Again, if you apply for one of these credit cards, your credit will be pulled.  Before you succumb to temptation, consider the following:

1) Your credit rating must be at least moderately strong.  I cannot give you a reliable estimate of how strong, because different credit card companies use widely varying criteria for each of their many cards; if your FICO score is below 680, my advice would be to pass on the offer.  It requires a much higher score than that to instill any real confidence of acceptance, so, as always, proceed at your own risk.  If your credit score is not strong enough, your application will be declined, or you may receive a credit card with a limit far below the tantalizingly large number they printed on the envelope.

2) You must be as sure as you can be that you will have the ability to transfer the entire balance of one or more of your existing credit cards to the new card.  If your credit card debt is substantial, as mine was, the odds of that may be slim.  Keep in mind that there will probably be a balance transfer fee, and low- or no-interest offers come with an expiration date.

Bullet #3) Ask to have negative items removed from your credit report.  This will not work in every scenario.  For example, home foreclosures and property repossessions for non-payment will not be removed just for the asking.  Some of the lesser offenses found on credit reports can certainly be whisked away, though.  The following script is based on a true story.

Credit Card Guy: Hello, how can I help you?

Me: Hello.  I was just reviewing my credit report, and I wanted to ask you about a couple of items.

CCG: Okay, Sir.

Me: I see that there are two payments from four years ago marked as "30 Days Late."  Now, I\'m not disputing facts, but I wonder if we might be able to clean up those items based on our relationship since then.

CCG: Let me pull up your account, Sir.  Yes, I see the items you are referencing.  We may be able to remove them, but I have to submit your account for review.  Just to let you know, this does not involve pulling your credit, so you do not have to worry about that.  We will send you a letter with the results.

About two or three weeks later, I got the letter telling me that the items had been removed, and they had transmitted that information to the three major credit bureaus.

The moral of the story is simply that if you ask for a better deal, you just might get it.  Gather your credit card statements, get a recent copy of your credit report, and see where you can find that better deal.