Reduce the number of credit cards that you have. The more credit cards you have, the lower credit score financing institutions give you and, consequently, you are charged higher interest charges & placed under more stringent conditions.

With multiple credit cards, keeping track of your expenses becomes a more difficult personal accounting task.

Believe it or not, you can live with only one credit card. With only one credit card, the monthly billing statement becomes an accounting record of your expenses. You only have to add your cash expenses (which are probably not a substantial portion of your monthly expenses) to the total billing and you have your total expenses for the month.

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Credit cards enable you to spend future cashflow, income that you haven’t earned yet but expect to earn with some certainty (e.g., regular paying job, income from own business, etc).

Credit cards are temptations to live beyond your means. You are living within your means if you are able to pay off the entire balance in your monthly bill. This is the best position for you. You are, in effect, getting a 30-day loan from the credit card company interest-free.

There is a GREAT TRAP in small intallment plans paid through your credit card. The amount appears so small that you think you can afford it. And, as a matter of fact, you can probably afford it. The problem arises when you keep making purchases through these small installment plans –which inevitably pile up and total into a big share of your monthly credit card balance.

Pay attention to your credit card balances and watch those small installment plans very closely. As always, if you can pay off 100% of your monthly balance, you are ahead because you are getting an interest-free loan.

If you are not able to pay off your entire balance and this balance grows from month to month, from bill to bill, you are clearly living beyond your means and should re-think whether you really need those purchases on installment. You don’t want to end up entrapped in a financial cage of your own making.

images from Microsoft Clipart, reconstructed by Ren Garcia

One big reason for households to spend future income through the use of & dependence on credit cards (and pile up credit card interest & penalties) is the huge portion of monthly cashflow that has to go into servicing a mortgage.

During the previous period of easy housing money, financial institutions were tolerating and allowing mortgages that ate up as much as 35% to 40% of the household’s monthly cashflow. This is one road to financial disaster.

Having to carry more than 30% of monthly cashflow to service a mortgage will leave inadequate cash for other necessary expenses and lead to inordinate reliance on credit cards, more interest & penalties, loan sharks & subprime credit . . .

The thumb rule for a mortgage that will allow the average houshold to have enough cash for other expenses, to afford a comfortable standard of living, and to maintain a savings rate of 5% of income is 30% of your monthly cashflow.

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Your credit card is a source of interest-free loan. But, this will work, if and only if you think of your credit card as a tool for personal cash flow management –rather than additional cash in your wallet.

It often happens that a purchase has to be made before your expected cash has become available. If you know that your cash will come in before the bill from the credit card falls due, make the purchase with your credit card –but pay off the whole purchase when your cash comes in and save yourself the interest cost. In this way, you will in effect have availed of an interest-free loan.

In today’s credit crunch and rising prices for oil & almost all commodities, you do not want to add interest & penalties to your expenses. Moneypenny offers some survival strategies in Digital Money World.

images from Microsoft Clipart, reconstructed by Ren Garcia

Credit Cards, so that they do not become a heavy burden (you can end up paying as much as 30% on interest & penalties), have to be managed just like any regular bank loan.

It is important to keep a proper mindset. Do not think of your credit cards as additional cash in your wallet. Thinking of your credit cards as available cash, you tend to purchase items that you want –rather than those which you really need. Or, if the purchases were for items you really needed, if you didn’t have the available cash in your wallet, you would postpone the purchase until you could afford it or had the available cash.

The proper mindset is to think of your credit cards as tools for cash flow management. You know more or less when cash will be available. If you are employed, you expect cash to come in at the middle and / or at the end of the month. If you are in business, you know when collections are expected.

It often happens that a purchase has to be made before your expected cash has become available. If you know that your cash will come in before the bill from the credit card falls due, make the purchase with your credit card –but pay off the whole purchase when your cash comes in and save yourself the interest cost. In this way, you will in effect have availed of an interest-free loan.

In today’s credit crunch and rising prices for oil & almost all commodities, you do not want to add interest & penalties to your expenses. Moneypenny offers some survival strategies in Digital Money World.

images from Microsoft Clipart, reconstructed by Ren Garcia

Before the end of the first semester of this year, you will be receiving the windfall from the recently passed “stimulus” bill:

individuals = $600

couples = $1200, $300 additional for each child.

This will be an excellent opportunity to climb out of subprime. Pay down as much of your credit card as the windfall will be able to cover. If you are in the deepest of the subprime category, you can be paying as much as 30% in additional interest and penalties. By using your windfall to pay down this debt, you will in effect be earning that much on your windfall. There is no investment currently existing that can earn you that much.

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Having found errors in your credit score and credit risk rating by obtaining a credit rating report from TransUnion (www.transunion.com), Experian (www.experian.com), or Equifax (www.equifax.com) and you have requested the credit bureaus to correct the errors and they are not listening or not doing anything, you can do the following:

Write a brief, factual letter explaining the error/s for inclusion in your credit history. The credit bureau is obligated to provide a copy to anyone who asks about your credit history.

Have the credit bureau append modifying words to the item you are contesting, e.g., “disputed” or “under review”, etc

Keep a copy of credit reports where you have a high credit score (i.e., higher than 600) and a low credit risk rating (i.e., below R or I 5). When you apply for a new credit card or a loan, these will show that you have been a good credit risk.

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The best way to handle a credit card and maintain a high FICO score and a low credit risk rating is to pay off the whole amount in your billing statement.

In the first place, this practice prevents your credit card balances from bloating to an amount that you will have a difficult time in covering in the future.

In the second place, the unpaid balance jacks up your credit risk rating (even if its a case of leaving a $50 balance out of a $1000 account). If the unpaid balance remains for five months, you run the risk of getting an R5 and falling into the subprime category.

Credit cardholders who earn a credit (or FICO) score below 600 or a credit risk rating of R5 & higher fall into the subprime category.

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Credit card applicants or holders who have a credit (or FICO) score below 600 or a credit risk rating of R5 & higher are given subprime credit cards.

There are major and small issuers and financial institutions who specialize in subprime credit cards, some of whom are predators, do not make full disclosures, and even drop a borrower into a subprime category just to be able to charge a higher interest rate. (Caveat: the pre-approved credit card you receive in the mail –with free membership fee & other enticements– may be subprime.)

Subprime cards carry extra fees and low credit limits. Huge penalties are levied on late payments and exceeded credit limits. Interest and penalties can add up to 3 – 5 times of the cost of a regular credit card.

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In addition to the credit score (or FICO score) where a score below 600 will drop you into the subprime category, financial institutions also do a credit risk rating where a borrower is evaluated according to a scale of 1 to 9, the lower scale being the better risk and deserving of lower interest.

To the number is attached a letter modifier: R (revolving as in credit cards) or I (installment as in a house or car loan).

Numbers 1 through 6 indicate the number of months you are habitually in arrears or late in payments, the number 1 declaring that you usually pay within a month. A credit risk rating of 7 tells the loan officer that you have consolidated your debts (i.e., some refinancing). A rating of 8 means the loan has been repaid through repossession. The dreaded 9 rating means you have been in default.

A credit risk rating of 5 and higher will drop you into subprime and a high interest rate. Interest rates assigned to the higher scales are discretionary (perhaps, how badly or well the day is going for the loan officer on your case).

A credit risk rating of “0″ (zero) is also given which means that the financial institution has not been able to obtain a history of debt service of enough length to make a judgment on how behaved a borrower you have been. However, the financial institution does not give you the benefit of the doubt and considers you unreliable (guilty until proven innocent) and will place you in the subprime category.

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