September 2006:
Ten Common, Costly Credit Habits
(And Their Debt-Defying Alternatives)

The news is in: consumer debt is rising and personal bankruptcy is again on the upswing. While the reasons for credit trouble are many, there are some common and costly borrowing habits to avoid. Know what they are, and what to do instead:

1. Having too high of a credit limit. Super-sized credit lines can feel like an open invitation to spend beyond your means. Say "thanks, but no thanks" to unnecessary credit line increases.

2. Keeping a balance. Owing even a little can cost a lot in money and time. For example, a $2,000 balance at 15 percent APR will take over five years to repay and nearly a grand in interest if you only made the minimum payment. Make a commitment to repay what you owe, no matter how seemingly small.

3. Using credit cards as income. Relying on credit cards to make ends meet is a short-term fix that just makes the next month more difficult. Never charge more than you can repay. Keep the primary rule of good money management in mind expenses should never exceed income.

4. Paying late. If your check arrives after the due date you'll be hit with a $35-$40 fee. Pay more than 30 days late, though, and the interest rate on not just that card but all others can skyrocket. Set up an automatic payment system with your creditors and financial institution.

5. Taking out cash advances. Treating credit cards as loans is not cheap! Not only will you be charged an origination fee, but interest begins immediately and usually at a high rate. Use credit cards for purchases only.

6. Waiting for/not getting help. Avoiding debt troubles makes matters worse the longer you put it off, the more your options dry up. Contact your creditors as soon as you think you may fall behind. Be prepared to explain your situation and propose a reasonable plan of action.

7. Relying on bankruptcy. The legal way out is more expensive, troublesome, and restrictive than ever. It is definitely not a solution for everyone. Save regularly and aggressively so you have cash for emergencies. Make sure your insurance coverage is adequate too.

8. Tapping home equity. Using equity lines and loans to pay down unsecured debt can be wise but run up the balances again and you put your home in jeopardy. Only use your home's equity when you are positive it makes sound financial sense. Run the numbers. If you spend more than you make, it's not for you.

9. Cosigning a line of credit or loan. It's nice to be nice, but not at the expense of your credit. If the other person fails to pay, the debt is yours. If you do cosign, go over the contract together, making sure you are both clear on the repayment terms.

10. Using high interest loans. Payday advances and unsecured, high interest loans are almost unbelievably pricey if you don't pay them off immediately. Tune out the marketing for these types of arrangements. You'll be glad you did.