Check out your wallet. Tucked among the pictures of your kids, the grocery-store lists, and the crumpled receipts, there are probably more than a few pieces of plastic. In fact, the average household with credit cards has more than 16 plastic rectangles that family members swipe, dip, or flash when they don't have the cash. The typical family carries a $9,205 balance, and about 20 percent of all cards are maxed out-but that doesn't stop people from collecting more. Every year, credit-card companies issue about 150 million new cards.
In an ideal world, we'd stop buying things we can't afford to pay for up front. But let's face facts: Most of us have no plans to part with our credit cards. Still, we can be smarter when we use them. Here are the top ten moves to make-and some expert advice on changing the way we charge.
1. Pay up in bigger chunks
Every time you make a payment for no more than the minimum, you're wading one step deeper into quicksand. That's because most of what you're paying is interest-not principal.
Let's say you're a member of the average family, trying to pay down a $9,205 credit-card debt with a typical interest rate (15 percent). If you send in the minimum payment each month ($184, a mere 2 percent of the total), it will take you almost 39 years to pay off your balance! In the meantime, you'll pay a whopping $14,798 in interest alone. And that's assuming you never charge another dollar. We know you know this, but we'll say it anyway: Pay up each month until it hurts, and wipe out your balance as quickly as possible.
2. Choose the right card
The top five card companies alone offer 30,000 different credit-card options. Your task is to pick the one that matches your spending and payment habits. If you carry a balance, you want a card with a low fixed-interest rate. If you're loading up on expensive baby gear, a card that doubles your warranties or offers cash back could pay off. If you're saving for a minivan, a card that offers points toward that purchase is worth investigating.
Fewer than 20 percent of bank credit cards charge an annual fee. Don't pay one unless the rewards far outweigh the cost (usually $25 to $125). For example, if your yearly charges are enough to earn you a free domestic airline ticket, go for it. If it takes you two years, however, you're probably paying more than the ticket is worth. And remember that there may be restrictions on when and how such tickets can be used. Don't be seduced by perks you won't actually use.
3. Cash in on freebies
Paying with credit provides protection that you don't get when you pay by cash or check. That's because credit-card companies have clout with retailers and because federal law says they are obligated to help you if there's a dispute over a charge. Some companies will replace your purchase if it's stolen or lost. Others extend warranties on the items you buy. Read the details of the agreement your company sends you. Then, if you've got a benefit, use it!
4. Slice up some plastic
Sure, it's nice to get 10 percent off your kids' summer clothes when you open a Gap credit-card account, but the more cards you have, the more likely you are to rack up debt. If you end up overextended, you could have a harder time getting a mortgage or an auto loan in the future. The ideal number of cards is two, according to Robert D. Manning, Ph.D., author of Credit Card Nation: The Consequences of America's Addiction to Credit. Sign up for one with lots of perks (and very likely a high interest rate as a result) and another with a low interest rate that you can transfer your balance to if need be. And if you have a favorite retail store whose card offers exceptional perks that you really use, it's okay to hang on to it. But don't just cut up those extra cards. Contact each lender to cancel them-otherwise the accounts will stay active on your credit report.
5. Prioritize payments
Not all bills are created equal. You'll have to decide which payments are most urgent, says Lewis Mandell, Ph.D., author of The Credit Card Industry: A History. Let's say you have three cards, and you can't afford to pay them all off at once. Rather than dividing your money equally among the three, pay down the card with the highest interest rate first. Pay the minimum on two cards and funnel the rest into the third until it is completely paid off.
6. Be demanding
It costs a credit-card company $80 to $200 to attract a new customer. So your company is probably willing to hustle a little to keep you—especially if you're a longtime customer or you normally carry a balance. Ask a customer-service rep for an occasional concession-an annual-fee waiver, a lower interest rate, an extended introductory rate, or cancellation of a late fee. If you're turned down, ask to speak with a supervisor, who has more authority.
7. Study the fine print
That microscopic legal babble on letters from your card company really does matter. So sit yourself down and start reading about the fees, limitations, and benefits of your contract. For example, just one late payment could send that low introductory interest rate to the moon. Or you may find that the low interest rate applies only to balance transfers. You may also owe a fee if you don't use your card for a few months.
8. Steer clear of cash withdrawals and those convenience checks
Think carefully before using your credit card at the ATM. When you make a purchase with your credit card, interest charges don't kick in until the next billing cycle. When you withdraw cash, however, you may be hit with an up-front fee of 2 to 4 percent-plus, interest on the cash is charged from that day forward.
You'll also be paying it back at a higher interest rate than your regular charges carry-typically 21 percent, says Kristy Welsh, author of Good Credit Is Sexy. This is not easy money! In addition, lenders often send convenience checks that you can make out to yourself or anyone else. But those can be deceptive-expect a high fee and immediate interest charges if you use them.
9. Scrutinize your bill
People make mistakes—a charge can be run through twice, or a waiter may misread your handwriting. Hold on to receipts until the end of the month, and check your statement against them. "If you don't recognize the charge, call the number on the charge description before you call the credit-card company. The merchant may be using a name you don't know," says Eva Rosenberg, publisher of taxmama.com.
10. Find the right help
If your credit-card debt is greater than 20 percent of your annual income, you need to get serious. The best first step: Consult a credit counselor, who can help you devise a plan for cutting debt. Get a directory of low-cost advisers through the National Foundation for Credit Counseling. "Be aware that most credit counselors are paid by creditors, who prefer that customers not declare bankruptcy, although it may be legal and beneficial," says Dr. Mandell.
Copyright © 2005. Reprinted with permission from the June 2005 issue of Parents magazine.