Everyone’s got advice for using credit cards.   Today, I thought I would take a look at the advice given out over at the famous financial commentator, the Motely Fool.

What Does The Fool Say?

Over at Fool.com, they have their 60-Second Guide to Managing Your Credit.   It is rather optimistic to think that all you need to know about credit cards can be learned in 60 seconds, but I think they are trying to emphasize the fact that this is not rocket science.

0:60: How much is enough?

Here they talk about your debt to income ratio, concluding that while “the ideal number is zero,…you want to keep your debt — including car loans — to 15% or less of your after-tax income.”

First of all, I personally don’t find it ideal or practical to have a true debt ratio of  zero.    If I were to check my credit report, I would find all of my spending since my last statement closed listed as credit card debt.    If my payment due date is tomorrow, I might have up to 45 days worth of spending listed as debt.   Note that I am paying all of this on time and in full, however it is listed as debt until the moment it is paid electronically on it’s due date.    I never pay interest, but the credit report still sees this balance as “debt”.

To express it more accurately, I have no revolving debt.    For me, this includes car payments as well.    As you might have read, I am not a big fan of car payments.    What is a bit more important, at least to your credit score, is your credit utilization ratio.    This should be under 30%.     The most likely reason it would not be is that you do not have enough available credit.

0:53: Don’t pay by their rules

Here they beg of you not to pay the minimum balance.    As you should well know, paying the minimum balance is a “fool” proof way to keep you trapped in debt for the rest of your life.   Medieval serfs had a greater chance of ever becoming debt free than the poor soles who attempt to pay off their credit cards by writing checks every month for the “minimum payment”.

0:46: Watch out for fees

Yes, fees are bad.   Never pay them.   Never pay late, do a balance transfer, or take a cash advance.    They claim there are card companies that will charge you an “inactivity fee” and will even charge you to speak to a representative.    I have heard of credit cards with such egregious fees, but perhaps they exist out in the sub-prime world.

0:35: Play the system

Here is some good advice.   Always call up your credit card company and tell them what you want.    If you are a good customer, they should waive fees, increase your rewards, or grant you other wishes.

0:26: In trouble? Stop charging

This is also great advice.   Whenever I find my monthly finances too close for comfort, I go on what I think of as a “spending diet”.    Every time I want to buy something, I ask myself to reconsider if I actually need it.   If I really must have it, I put it off until it appears on my next statement.     If you are having trouble paying your bill on time and in full, now is the time to go on a big diet.

0:23: Boost your credit GPA

This is their way of telling you to monitor your credit score and keep it high.

0:18: Carry just what you need

I am going to have to disagree with this.   I wish it were the case that having fewer credit cards resulted in a better credit score, but sadly it is not true.    A major component of your credit score happens to be your utilization of credit, see “0:60: How much is enough?  “.      Unfortunately, having too few cards actually hurts you as it raises your credit utilization ratio.

0:13: Get some free stuff

These are the words that I live by as a reward card aficionado.   If you use credit cards as charge cards, only charging what you will pay off at the end of the month, there is no reason you should not be choosing your credit cards in order to maximize your rewards.

0:05: Teach your children well.

Pass down what you have learned to your children, as without your guidance it is all too easy to develop habits that will cause them become trapped in debt.

In Conclusion

These are some very good rules.    I would have included some valuable advice on managing your bills with electronic payments.     I also think that the Fool needs to brush up on credit utilization ratios and the current reality of credit scoring.

One of our readers, Desiree, had this question:

Is there any possibility of getting a home loan sooner than 2 years after a bankruptcy discharge? My husband and I have continued to make car payments, have great payment history with the credit cards that we opened after we filed, and also have steady verifiable incomes. Is there any hope?

Thanks for your question Desiree!

It is possible to get a home loan sooner than two years after your file for bankruptcy, but it is difficult.

There are a number of steps you can take to tip the scales in your favor, but it is not a guarantee. Some lenders will not work with you on principle - because their company policy has a two year clause. If you put your paperwork in order, and choose your lender carefully, then there is a possibility that you can still get a home loan. If you and your spouse both declared bankruptcy, make sure you both go through these steps in preparation for the loan.

Steps You Should Take Before Meeting With A Lender:

1. Check All Three of Your Credit Reports - Make sure that every single account that was included in your bankruptcy shows up on your credit reports as being included in your bankruptcy. I had no end of trouble with this after my own bankruptcy. Companies that I had included in my bankruptcy continued to report my accounts as open on my credit reports. It took me several months to get everything straightened out.

   So, check all three of your credit reports, and make sure that each account has a notation under it that says “Included in bankruptcy”. If it doesn’t, then it is still counting against your credit score each month.

2. Challenge Any Negative Information On Your Credit Report - Obviously you don’t want to challenge every single negative item because it will backfire. If you challenge too many things at once on any of your credit reports, the credit bureaus will freeze your credit score until the dispute is resolved. So, just selectively challenge a couple of items that could have an impact and raise your score a little.

   Look for accounts that are incorrect, or situations where the same account was sold to several collection companies and each of them reported your debt individually. For step - by - step instructions on how to do this you can read this article: How to Dispute An Item On Your Credit Report

3. Check Your Credit Score: If your credit score hasn’t recovered enough to be in the high 600’s or low 700’s you will have some difficulty getting a home loan. If your credit score isn’t in this range, you may need to wait a few months and work on raising your credit score before you apply for any sort of home loan. You can check your credit score at MyFico.com
4. Make Sure Your Current Credit Cards Are Paid Off - If you are carrying a balance on any of your current credit cards, either make sure you pay the balance in full, or pay the balance down to less than 20% of your total available credit. Then give your credit report a couple of months to reflect the changes in your balance.
5. Interview Prospective Lenders: Ask them point blank on the phone whether or not they will work with someone who is less than two years out of bankruptcy. There is no sense in wasting your time or theirs. Some lenders will, some lenders will not.
6. Before You Meet With Your Lender: Make sure that you get all of the following paperwork together: Last year’s tax returns, six months to a year’s worth of proof-of-income, a current copy of your credit reports, your credit scores, proof of checking and savings accounts, your bankruptcy discharge papers, and anything else you feel might be relevant to a prospective lender. Take all this stuff with you to your first meeting. It will show that you are serious, and it will improve your chances of getting loan.

As a last recommendation, it wouldn’t hurt to pick up the book “Credit After Bankruptcy” by Stephen Snyder. I bought it used for a couple of bucks on Amazon, and it is literally full of quality tips. Best I remember, Snyder bought his own home almost right out of bankruptcy, and he details that process in his book. Remember though, that when he was going through the process, home loans were flowing like water - today the economic condition is not as good and it is going to be more difficult today than it was then.

I wish you guys the very best of luck as you go through this process. Be persistent, you may have to interview dozens of lenders in order to find one who will work with you, but it will all be worth the trouble when you are actually in your home.

Good luck, and please let us know how it goes. Also, please feel free to come back and ask any other questions that you may have about the process.

Do You Have A Question? Leave A Comment Below!

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One of our readers,Teresa, had this question:

I have a question. I filed for bankruptcy - chapter 13 in 2007 and have 5 years to pay it off. I did not want to put my credit union in the mix but my lawyer said it was mandatory. I had excellent credit before filing for bankruptcy (”robbed Peter to pay Paul theory).

I owed my credit union a little under 7,000 - can I pay them back in a lump sum - I wanted to pay them with my bonus - am I allowed to do that since they are in my bankruptcy.

I have the 5 year plan and the bankruptcy will be over in Feb , 2012. In 2007 before bankruptcy filing I opened a checking/savings account with a bank but you have to have 100 in each acct. each month to avoid 10 fee for each. I would really like to use my credit union again. Please advise.

Thanks for your question Teresa! You should be able to pay off this part of your Chapter 13 without a problem. However, you need to contact the lawyer or law office that handled your bankruptcy first. This is because the laws that govern the hows and whys of changing your bankruptcy terms vary by state. Your lawyer will also need to verify where the money came from.

So yes, it should be possible, but don’t take the chance without speaking to your lawyer first so that you are confident that you stay within the law by doing it.

Thanks for your question!
Mr. CC

While American Express was suspending my accounts for their “Financial Review”, Capitol One sent me a nice letter telling me that they appreciated my business and wanted to know if I would like increased rewards.

Would I?!

When I had a few minutes on my hand I actually called the number on the letter and told them, yes, I would like increased rewards.    Currently, I receive 1% cash back on all of my purchases from my Capitol One “No Hassle” rewards card.    On top of that, I get another .25% back at the end of the year.    Capitol One had been my backup Visa card to my Starwood American Express, which had been my primary card.     Since Amex decided to play games with me rather than appreciate my business, I had been using the Capitol One card as my primary card recently.

What I Got Out Of It

For five minutes of my time, I got to listen to one of their account reps tell me how they appreciate my business, the kind of love I have definitely not been receiving from Amex lately.   Affection aside, they asked me what more I would want out of their card.    I would like more cash back I told them.     Then, they actually raised the rewards from 1% to 2% for the next three months, on top of the .25% I get at the end of the year, for a total of 2.25% on ALL purchases.     This is an industry leading offer, yet the extra 1% is only valid for three months.    I had been considering the new Schwab card with 2% cash back, but this is now even better.

It Can’t Hurt To Ask

This got me thinking, when was the last time I had merely asked for more rewards?    I got an additional 1% back from Capitol One just by asking.    Frugal Travel Guy got 2,000 Starwood Starpoints just for asking a question.     What rewards benefits might you get by calling up your credit card company and asking?    Maybe there is a better card for you, or they are willing to up your bonus.     They point is that you won’t know unless you ask, and it can’t hurt to do so.    So what are you waiting for?

Couples And Accounts

While I was speaking with the friendly Capitol One rep, I brought up another issue.    A few months ago, my wife lost her card, and we had the most difficult time getting it replaced.    At first they seemed helpful when she talked to them, but then they told her that she didn’t have permission to request a new card.    When I called them up, I was upset, as she is a joint account holder in all of our accounts, presumably with Capitol One as well.    Unfortunately, that is not how they saw it.   In their system, the card was in her name, but the account was in mine.    The only way that they could change that would be to close my account and create a new one with a joint application.    The workaround that they offered was to fax in a power of attorney form.      That is a pain, but it is ultimately necessary to ensure that both of us can make changes to the account when necessary.

The rep I talked to walked me through the process and we got it taken care of, but it is a good thing to keep in mind.    You never know when a card will be lost or stolen, and it helps if either card holder can call it in and get it resolved.

All in all, kudos to Capitol One for recognizing their valuable customers rather than infuriating them like America Express!

One of the biggest things that anti-credit proponents like to hold up is that using credit is more expensive. But is it really?

Credit Can Be More Expensive:

If you take out a loan or carry a balance on your credit cards then yes, credit is more expensive. You will be charged interest on your purchases. If you use credit this way, then you will always end up paying more for whatever the item is that you purchased - whether it’s a house, a car, or a sweater.

Using Credit Wisely Can Save You Money:

Purchasing things on credit does not have to be more expensive. It all depends on how you use your credit cards. If you can discipline yourself to pay your balance off in full each month then using credit can actually save you money - a lot of money. Using your good credit score to help you leverage your debt can also save you money.

The Easiest Ways To Save Money By Using Credit:

1. Combine Store Sales With A Cash Back Credit Card - My favorite method for this works especially well when you shop online. You can first go through a program that gives you cash back - something like UPromise, or Mr. Rebates. Then you visit their affiliate partners (Upromise has hundreds - many are stores that I regularly shop at anyway) and buy what you need on clearance. You then pay for your purchase with a cash back credit card.

   When it’s all said and done, you get a discount from the store (Usually 20-75% when I shop) you get several dollars back in cash from your rebate program, and you get 1-2% or more back in cash from your credit card.

   It may not seem like an enormous amount, but over a year’s time it really adds up and it takes very little effort once it becomes a habit.

   Even when I’m not shopping online, carrying a cash back credit card and using it for regular purchases is like getting a small perpetual discount on everything that I buy. As long as I pay my balance in full, I do not get charged interest, and I get to keep the discount.

2. Keep Up Your Credit Score - Never charging more than I can afford to pay back in a given month keeps my credit score healthy. I show a strong record of responsible credit use, and regular payments. That means that when I do have to take out a loan that charges me interest (like a home loan, or a personal loan) I will always pay less in interest than someone who regularly carries a balance on their credit cards, or makes their payments late.

   This is one tactic that people who do not understand credit get burned on. If you never use your credit cards, and you never make payments because you haven’t charged, then you end up paying hundreds or thousands of dollars more over the life of any loan that you take on.

   An even further negative repercussion to not using credit is that with the economy the way it is, you may not be able to get a loan at all if you don’t have an established credit history.

3. Leverage Your Debt - We discussed the pros and cons of using credit to leverage your debt little bit on Saturday. Long story short - If you use your credit responsibly, and you find yourself in the position of having to pay interest on something, then you have a wide variety of options that most people do not have. You can refinance any time it meets your needs, balance transfer your balances to new accounts with better terms, and generally never pay more than the lowest interest rates available at the time.

So, how do you go about using credit cards correctly? What if you are already in debt and want to take advantage of these benefits? The best, and easiest thing to do is to give yourself a quick financial checkup. Start by checking your credit score. It is not free to check your score, but it is a worthwhile investment if you are thinking of opening up a new credit account, balance transferring, or leveraging your debt in any way.

If your credit score isn’t approaching, or well over 700, you are going to have a hard time taking advantage of credit’s greatest benefits. If it’s over 700, then you’re in a great position to compare credit card offers.

If Your Credit Score Is Below 700:

These simple steps will raise your credit score. If you make them your habit, you will never have to worry about your credit score again. It will go up each month, and continue to go up throughout your life.

1. Do not carry a balance on your credit cards - If you are carrying a balance on any credit card that you own, stop charging until you get that balance paid off. If you are paying down the balance on one card while earning rewards with a different credit card - ok - just make sure that paying off the revolving balance takes first priority. Doing that will save you the most money in the long run. You aren’t really earning rewards if you get 1 or 2% back and you’re being charged 10% in interest each month.
2. Pay Your Bills On Time, Every Time - Set up an auto-draft if you need to, or mark it on a calendar, but don’t be late. Making your credit card payments late drops your credit score and you get eaten alive in fees (and then you get charged interest on those fees the next month).
3. Remove Yourself As An Authorized User - If anyone else’s credit accounts are showing up on your credit report, it is probably in your best interest to remove yourself as an authorized user. Unless you have complete control over the way that the other person uses their credit and pays their bills, then you could be setting yourself up for failure. If you are an authorized user on someone’s account, and they make bad credit decisions, it will effect your credit score too. It’s something that you will want to avoid unless you have an extremely low credit score and need the help (along with the risk).
4. Check Your Credit Report and Challenge Bad Information - Every negative item that you can have removed of of your credit report will raise your score. Just be sure that you don’t challenge too may items at once, or your credit score will be temporarily frozen until the challenges are resolved. For instructions on how to do this, check out our article: How to Dispute An Item On Your Credit Report

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Every Sunday here at Ask Mr. Credit Card we review a personal finance book. This week we are reviewing Increase Your Financial IQ by Robert Kiyosaki. If you missed the first two sections of the review you can read them here:

• Increase Your Financial IQ Book Review
• Increase Your Financial IQ Book Review Part 2

In this section of the book Kiyosaki takes an in-depth look at the different Financial IQ’s, beginning with number one.

Financial IQ #1: Making More Money

Kiyosaki spends some time detailing his own history here. How he graduated from school, took a job with Standard Oil, and then left that job and took a huge pay cut to voluntarily serve in Vietnam. After spending five years in the military (one in Vietnam) he was honorably discharged.

When Kiyosaki returned home he took a job with Xerox - because he wanted to learn to be a salesman, and they provided excellent training. He took the job even though it meant he would take yet another pay cut. Kyiosaki claims he did this because the education was more valuable than the immediate income.

After working for Xerox for a couple of years, and eventually becoming their top salesperson, Kiyosaki started his own business - selling nylon surfer wallets. He briefly chronicles the rise and eventual fall of this business, and then the struggle of rebuilding it.

He believes that every step of his journey made him smarter, more financially educated, and it set the stage for his current business success with The Rich Dad Company.

Every Goal Has A Process:

As we all know, every worthwhile goal has a process and takes work. For example, to become a medical doctor there is a rigorous process of education and training. Many people dream of becoming a doctor, but the process gets in their way. Let me tell you, my own process was a lot of work!

One of the reasons people lack financial IQ #1: making more money, is because they want the money, not the process. What many people do not realize is that it’s the process that makes them rich, not the money.

One of the many reasons lottery winners or kids who inherit family wealth are soon broke is because they received the money, but didn’t have to go through the process. Many other people fail to become rich because they value a steady paycheck more than the learning process of becoming financially smarter and richer. They are held back by the fear of being poor. It is this very fear that keeps them from taking the chances and solving the problems required to become rich.

Wow. That’s some of the best wisdom I believe I have ever seen in a financial book. It is the process that makes you rich. The learning new things, learning from your mistakes, failing, picking yourself back up and doing it again.

Maybe I’m odd, but I find it comforting to think of being rich as a process - a path that I am already on even if I dive into the gutter from time to time. It’s a path that I choose, and that I have control of. That is a very different thing than buying a lottery ticket each day and hoping you will get rich without the process. It’s also a very different thing from experiencing failure and deciding to stop.

The process Kiyosaki is talking about means that you pick yourself back up no matter what your failures are, and you learn from them, and you apply that new knowledge to your life.

Emotional Intelligence:

At this point it is important to point out that financial intelligence is also emotional intelligence. Warren Buffett, the world’s richest investor, says, “If you cannot control your emotions, you cannot control your money.” The same is true for your process. One of the toughest parts of my process was not quitting when I was depressed, not losing my temper when I was frustrated, and to continue to study when I wanted to run.

Another reason many people fail in their process is they cannot live without instant gratification. The main reason I mentioned the low pay I received at the start of my life was to illustrate the importance of delayed gratification. Many will sacrifice a richer tomorrow for a few bucks today. I did not make much money in my twenties or thirties, but I make millions today.

In fact, I would say that when it comes to money, emotional intelligence is the most important intelligence of all.

Instant gratification does keep you poor! I lived many years in that cycle - getting a little money, buying everything I could think of with it, and then being broke until my next paycheck. It wasn’t until I learned to save, and to wait for what I wanted, that I was really able to break out of those chains.

It too effort, time, and education as well, but mostly it took self control. Which, when you boil it down, is pretty much what this entire chapter is about: Having the self control to learn, persevere, learn from your mistakes and wait for your reward - instead of expecting the same reward without the work or discipline.

Why The Rich Get Richer:

One of the reasons the poor and middle class struggle is that they work for money and a steady paycheck. The problem with working for money is you have to work harder, longer, or charge more to make more money. The problem with physically working harder and longer is that we all have a finite amount of time and energy.

One of the reasons why the rich get richer is that every year they work to build or acquire more assets. Adding more assets does not require working harder or longer. In fact, the higher a person’s financial IQ, the less he or she works while acquiring more and better assets. You see, assets work for the rich by producing passive income.

This core concept is one of the reasons why I love Kiyosaki’s books. He is right - most people work for money - paychecks - not assets.

What he never really does hit on much (but it’s fairly obvious) is that if you are currently earning a paycheck, and have no assets, use that paycheck to buy your first assets. Rinse and repeat until you no longer need the paycheck. Then you will no longer be working for money. The longer you do this, the more assets you will build, and the more financially secure you will be.

Be A Problem Solver:

In order to grow wealthy, you must come to terms with the fact that problems will never go away. Each time you find a solution to problem, a new one will pop up. The key is to realize that the process of solving those problems makes you rich. And once you start solving not only your own problems, but other’s as well, then the sky’s the limit.

People will pay money for you to solve their problems. For example, I will pay money to my doctor to keep me healthy. I pay money to my housekeep to keep my house tidy. I shop at my local supermarket because my problem is hunger and starvation if I don’t eat. I pay taxes to public servants to provide a well-run government. I put money into the offering plate at church to support my spiritual guidance and education.

My Wife makes a lot of money because she solves a big problem; the problem of quality housing at an affordable price. The more she works to solve this problem, the more money she makes. I work hard to solve the problem of the need for financial education.

Simply put there are trillions of ways to make more money because there are trillions of, if not infinite, problems to solve. The question is, which problems do you want to solve? The more problems you solve, the richer you will become.

Many people want to get paid for doing nothing, and are unwilling to solve any problems. Or they want to be paid more than the problem they are solving is worth.

This is a very pragmatic approach, isn’t it? It’s very true. If we find a way to solve a problem, or fill a need - not just for ourselves, but for others too - then we can certainly become rich by doing it. Especially when Kiyosaki’s other tenets are put into play - learning from our mistakes, not giving up, and not working for money but rather, for assets.

Kiyosaki On Capitalism:

I included this section here at the end of the review because it made me laugh:

I am a capitlist, not a laborer….Many think of capitalists as pigs. And many are greedy pigs. Yet there are capitalists who do a lot of good, such as provide health care, food, transportation, energy and communications to the world.

As a capitalist who does my best to make the world a better place, my problem is with people who want to be paid for doing nothing, or paid more to do less. In my opinion, a person who wants to be paid more and do less, or nothing, is also a greedy pig.

Here’s to capitalism

I hope you enjoyed this section of the review. If you’d like to read future personal finance book reviews, be sure to grab our RSS feed - it’s free and it will deliver our articles straight to your feed reader or email.

Next week we’ll take a look at the next section of Rich Dad’s Increase Your Financial IQ. Thanks for reading!

Have you read this book? Do you have a personal finance book you’d like to see us review? Leave a comment below!

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• Suze Orman The 9 Steps To Financial Freedom Book Review
• The Guerrilla Guide To Credit Repair
• Credit After Bankruptcy: A Book Review

For some people using credit to leverage their debt makes perfect financial sense. For others, it’s something to be avoided completely.

This argument has deep moral and emotional roots that are squarely pitted against what ought to be purely logical behavior.

To be honest, I think the one thing we can all agree on is that being in debt is not a positive thing. The only question is, how do you go about getting out of debt, and what is the best way to do it? Turns out the answer is personal!

Choosing Not To Leverage Your Debt:

Choosing not to leverage your debt usually means that you stop using your credit cards, make no attempt to balance transfer your debt, do not borrow against your home, do not consolidate your loans, or borrow extra money in any way in order to repay your debt.

In other words, you stop “playing games” with your finances and just pay down your debt as quickly as possible.

Dave Ramsey is easily the most famous proponent of this method, and many, many people have used his tactics to become debt free.

As far as my peers, the personal finance bloggers go, they are all over the board on the leverage issue - with some very notable stand-outs:

In the past, I have reviewed other financial web site’s rules about credit, and I have even offered some of my own.

How Does The Consumerist Stack Up?

The Consumerist is one of my favorite web sites.   They regularly highlight corporate abuses, consumer best practices, and outright zanny behavior from companies of all sorts.     One of their writers, Meg Marco, has even written, the “Consumerist’s 10 Commandments of Credit”.

Here is my evaluation of them:

1) Thou Shalt Pay Off Your Balance In Full Every Month.

We are off to a great start here.   I mention this in most of blog posts about reward cards.    This habit is so critical since those who start down the dark path of interest payments have a hard time digging themselves out.

2) Thou Shalt Get A Credit Card With Extended Warranty Protection, Cash Back or Reward Points, And Thou Shalt Take Advantage Of Them.

Here Meg is just getting started on the virtues of using a credit card over cash.   There are now reward cards that offer an amazing 2% cash back on all purchases, as well as other reward cards that can offer rewards worth 4% or more.     As long as you are paying your balance off in full every month (see rule number 1), you are throwing money away if you do not have a reward card.    Extended warranties are great, although I have never used them, but so is rental car protection, loss protection and all of the other benefits offered by most cards

3) Thou Shalt Check Your Credit Report.

Kind of like flossing your teeth twice a day, this is great advice that I am afraid to admit I don’t always follow.   I have checked my credit report many times before, but checking all three major agencies for my wife and I, once a year like clockwork is a task I just haven’ t gotten around to.

4) Thou Shalt Pay All Bills On Time.

This is a no brainer.   Organizing your finances around a user friendly electronic payment system is probably the single greatest thing you can do to save time and money.   Once you do so, paying your bills on time can take just a minute a week.   My only criticism is that this rule is awfully similar to rule number one.   I guess she had to get to 10 Commandments somehow.

5) Thou Shalt Avoid ID Theft. Buy And Use A Shredder, and Thou Shalt Not Fall For Phishing Scams.

More excellent advice.   I have witnessed people going through my trash the night before pickup, and now I only put the trash out in the morning.    A shredder is such a cheap investment, compared to the years of agony it can take to undo the damage of identity theft.     Phishing scams can be remarkably easy to fall for, so educate yourself and your family on what they are and how to avoid them.

7) Thou Shalt Avoid Interest On Consumer Debt. Thou Shalt Try To Pay Interest Only On Student Loans, Mortgages And Car Loans.

I have an objection here.   I do not believe in making payments on cars is a wise use of your money.   Cars, unlike education and homes, are a terrible investment.    New cars loose value the moment you drive them off of the lot.    You can always drive a better bargain with a dealer when you are paying in cash.       I believe that you should only drive a car that you can afford to pay for in cash.  If that is not a new car, there are plenty of great used cars out there.   Car loans have terrible interest rates compared to home loans and education loans.   Furthermore, they are not even tax deductible.

If you absolutely have to drive a car more expensive than you can pay for, at least take out a tax deductible home equity loan.   That way, you get to pay for it in cash, you get the tax deduction, and you get a much better interest rate than you would on a car loan.

Think you are getting a great rate with a manufacturer’s promotion?    Think again.   Even the 0% interest rates usually have some small print offering you thousands less if you pay by cash.    You are not getting a low interest rate, just a higher price.

Thou Shalt Keep Thine Credit Utilization At A Reasonable Level.

This is more good advice.   It doesn’t make sense, but you are actually penalized by the credit agencies for not having enough credit cards.    It is a stupid way of enticing people to take out more credit than they need, but it is the way it works.    Even if you think you have enough credit, if you regularly use more than %30 of it, consider finding another credit card, especially one with a generous sign up bonus.

9) Thou Shalt Not Cancel Credit Cards, Thou Shalt Try To Keep Them Open So As Not To Shorten Thine Credit History.

This is also good advice, but vague.   My understanding is at least a year is good history.   I don’t open and close cards in less than a year.   After that, I don’t mind closing a card to take advantage of a newer offer.

10) Thou Shalt Not Constantly Obsess Over Thine Credit Score. Life is too short.

More good advice.    Why bother obsessing about this.   If you followed the other rules, you have very little to worry about.

In Conclusion

Good work Meg!  Now just pay off your car and start saving up for one that you can pay for in cash.

One of our readers, Karen, recently left this comment:

I opted to pull out my 401k early to pay off debt. In doing so I’m losing about half of my retirement money. There are taxes and penalty fees for early withdrawal, not to mention the loss I took in the stock market. Bottom line is if I pay off all that I owe in credit card debt and loans, I will be broke. I had to quit my job to pull out my 401k, so the credit card debt has gone up due to late fees and over limit fees. I want to negotiate a fair amount with the lenders so I can pay them off. Is this a goal I can likely achieve?

Thanks for your question Karen!

I am sorry that you had to pull out your 401(k) money. Paying off all of your debt and loans is an excellent goal though, and it will put you in a much better financial position. To answer your question, yes, you can definitely negotiate with your lenders (All your lenders, not just your credit card companies) to get late, over the limit and any other fees removed. Especially if you are willing to pay the accounts in full.

In order to do this, you will need to get your paperwork in order first. Pull together the names, addresses and phone numbers of all your lenders. Make sure you have the current total owed as well. Then, all you have to do is give them a call. There are five key things to remember when negotiating with your lenders:

We also had another reader with a similar question about debt negotiations. Andrew left this comment:

I lost my business in April of this year and things are starting to catch up. I spoke to Chase on my business card and they agreed to cut my payments in half as well as my interest rate for a year, which helps a lot.

Bank of America however will not do anything. I called and asked to negotiate a payment plan but they said they would refer us to a non-profit for credit counseling. This is after they did a pull on my credit which i did not authorize. I do not want to go to a non-profit credit counseling. If Chase can help me with payments why can’t BofA help me out too? Should I keep calling or requesting to talk to someone else there? Any advice on how to approach the difficult nature of BofA. Who should I ask for? What else should I say? Should I wait for it to go to collections to negotiate with them? or at least threaten them with, “Im paying Chase first before I pay you, since they are helping me”? Please help…

Details:

Payment is about 450 and was requesting half. I am one month late now. I told them next month will be hard as well and that I lost my business in April this year. Interest rate is 30% with a balance a little over 12k.

Thanks

Andrew

Thanks Andrew, for your question. They steps you are going to need to take are similar to the ones for Nancy above. There are two differences though. Since you are not going to be paying your balance off in full, you do not have quite as much room to negotiate with your lenders. However, being a month past due actually gives you as much or more room to negotiate. This is because the collection departments at ever major credit card company have a lot more authority to alter your account.

So, that said, what should you do?

Definitely call Bank of America back. Do not let the account site without contact - take the initiative, and keep calling them as many times as you need to until they are willing to set up a reasonable payment plan.

Make sure that you speak with a manager (politely). Request that all possible fees be removed from the account, and ask them what you need to do to set up a payment arrangement with them. Tell them you are handling your credit accounts yourself, and that you will not be going through a credit counselor. Make sure they know that if they want to resolve the account and get a payment from you that they need to deal with you, and you alone.

It’s a pretty standard procedure for most collection departments to set up payment arrangements, so I do not anticipate that you will have any trouble. If you do, and they give you trouble like they did before, just hang up and call back to reach a different rep. Or, wait about eight hours and call back to reach a different manager. Explain your circumstances, tell them what you can afford to pay them, and then make a payment that day.

It is important to be ready to make a payment before you call otherwise, they may not be willing to negotiate with you at all.

I hope that this answered your question. If you run into any more trouble, or have questions about anything else, please leave us another question and we will do what we can to help you out.

Thanks!
Mr. CC

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• Negotiating With Your Creditors When You’re Past Due
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Happy New Year from all of us here at Ask Mr. Credit Card.com!

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We also had some really noteworthy posts and activities in 2008:

• We introduced our new Cash Back Credit Card Calculator
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• We focused in on how to get home loans, car loans and credit cards after a bankruptcy.
• We posted several articles on the new credit card bill of rights legislation.
• We also featured How-To guides like how to get your first free flight and how to dispute an item on your credit report.

Wishing you a joyous and prosperous 2009!

Mr. CC