[MORTARDUDE]

Philadelphia Inquirer

October 16, 2003 Thursday

On Personal Finance / Cutting up a credit card isn't enough, but it sure can be a good place to start

By Jeff Brown; Inquirer Columnist


Today is National Cut-Up-Your-Credit-Card Day. I'm not sure who decides such things - probably some public-relations outfit.

But who cares? Every day is a good day to cut up a credit card or two.

Recent studies show that Americans' debt is rising alarmingly. The debt-counseling, nonprofit organization Myvesta.com, of Rockville, Md., says its new client now has an average of 11.3 credit cards, compared with 8.1 last year. The clients' debts rose from an average of $52,210 last year to $77,036 this year.

Now we know how consumers manage to keep spending while wages stagnate and unemployment rises.

Reducing card debt is largely a matter of common sense: Don't use the things so much.

But there are a few points to keep in mind in wrestling this monster under control.

Start by paying off debts on cards with the highest interest rates, but be sure to pay enough on the cards with lower rates to avoid late-payment charges and, perhaps, a higher interest rate.

Be conservative about transferring balances. You may get offers to switch your balances from high-rate cards to cards with zero-percent or low-rate grace periods. Making the switch can save you a lot in interest payments. But remember that every time you get a new card, it shows up on your credit report, and lenders will look at whether you're really chopping the debts or just postponing them.

Keep records of card expenses. By that, I mean a running tally updated every time you charge anything. Obviously, you should have a budget.

Get rid of excess cards. Two or three cards is plenty. You don't need one from every store and gas station you frequent, even if they offer discounts on the initial purchases made on new cards. It's tempting to keep a few extra cards "just in case," even if you have no balances on them. But all that borrowing capacity recorded on your credit report can make lenders wonder whether you're a potential card abuser.

When you toss some cards, keep one or two of the oldest and keep using them. That helps to show a long - and, hopefully, responsible - credit history. To avoid interest charges, pay off the balance during the grace period every month.

Cutting up a card isn't enough. To keep your credit report accurate, you need to cancel unwanted cards by calling the customer service number on the back.

Be sure the card is debt-free first, else the issuer may stick you with a super-high rate on the outstanding balance after you cancel. And use any perks such as frequent-flier miles before you cancel, or they may be lost.

People with out-of-control debts often turn to "credit counseling" or "credit repair" organizations. Though many are good, federal regulators warn that there are lots of unscrupulous operators, including some that dress up their appeal by calling themselves nonprofits.

On Tuesday, the Internal Revenue Service, Federal Trade Commission, and a group of state regulators issued a useful set of tips for avoiding bad credit-counseling organizations.

Avoid any outfit that says it can solve your problem immediately. It can't. Paying off debts and improving your credit history is a long process. In fact, it's illegal for any organization to say it can get negative information such as a bankruptcy removed from your credit report.

Don't do business with organizations that charge high fees or demand "voluntary contributions" that will leave you with less money to pay down your debts.

Be sure any organization you use offers counseling and education to help you change your spending habits. Scour the brochures and agreements for information on costs, services and guarantees.

Check with your creditors to make sure they will work with the counseling outfit. If you make payments through the counselors, check with creditors to make sure your debts are really being paid.