YOU and YOUR CREDIT: Managing Your Credit1

Joan P. Elmore, Sarah M. Ellis, Michael S. Gutter, and Travis P. Mountain 2

How much debt can you realistically carry?

The debt service-to-income ratio compares your total annual debt repayments (including rent or mortgage) to your gross annual income (income before taxes and any deductions). A desirable ratio is .36 or less. For example, a household earning $40,000 annually should not have debt payments totaling over $14,400 per year.

Figure 1. 
Figure 1. 
Credit: lovelyday12 / iStock / Getty Images Plus

How much credit can you afford?

Your gross income $ __________

36% of your gross income $ __________

Source: USDA Rural Development

Credit Card Worksheet. 

This worksheet can help you analyze your credit cards, costs, terms, conditions and your needs to select the best credit card(s) for you.

INTEREST APR's

Card A

Card B

Card C

Purchases

 

 

 

Cash Advances

 

 

 

Balance Transfers

 

 

 

 

INTEREST RATE

 

 

 

Fixed

 

 

 

Variable

 

 

 

Introductory

 

 

 

Tiered

 

 

 

 

GRACE PERIOD IF YOU:

 

 

 

Carry a balance

 

 

 

Pay off balance each month

 

 

 

Cash advances

 

 

 

 

FINANCE CHARGE—HOW COMPUTED:

 

 

 

Average Daily Balance

 

 

 

Two-cycle Billing

 

 

 

Minimum finance charge

 

 

 

Other

 

 

 

 

ADDITIONAL FEES

 

 

 

Late Fees

 

 

 

Over the Limit

 

 

 

Annual

 

 

 

Other

 

 

 

Other

 

 

 

Other

 

 

 

 

OTHER FEATURES

 

 

 

Rebates

 

 

 

Frequent flyer miles

 

 

 

Insurance

 

 

 

Other

 

 

 

Source: Federal Reserve Bank

Inventory of Credit Cards and Loans. 

It is important to keep this information in a secure place with your other valuable papers in case of an emergency like fire, hurricanes, etc.

Creditor Name/address

Account #

Phone #

Interest Rate

Current Balance

Due Date

Monthly Payment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Monthly Amount: ____________

Date of Inventory: ________

Additional Comments

 

 

 

 

 

A Closer Look at the Cost of Credit—The Minimum Payment Trap

Table 3. 

Making Minimum Payment (4% of amount borrowed)

ITEM

RETAIL PRICE

APR

INTEREST PAID

REALLY PAID FOR ITEM

YEARS TO PAY OFF

TV

$500

18%

$216

$716

4 years, 11 months

Computer

$1,000

18%

$516

$1,516

7 years, 3 months

Furniture

$2,500

18%

$1,416

$3,916

10 years, 3 months

This chart assumes you are not making additional purchases and you are making payments on time. You can call your credit card company and ask them for the number of years it will take to pay off the current balance if you only make the minimum payments.

Table 4. 

Making More than the Minimum Payment? It Pays Off.

ORIGINAL BALANCE

APR

MONTHLY PAYMENTS

TOTAL # OF MONTHLY PAYMENTS

TOTAL YEARS TO PAY OFF

TOTAL OF PAYMENTS

$2,500

18%

Minimum

123

10 years

$3,916

$2,500

18%

Minimum + $25

50

4

$3,258

$2,500

18%

Minimum + $50

33

3

$2,839

This chart assumes you are not making additional purchases and you are making payments on time.

Request a Lower Interest Rate

If you have been with a credit card company for several years and are in good standing, you can request a lower interest rate. The steps include:

  1. Dial the 800 number on the back of your card.

  2. Use this sample script: Hi, my name is (your name). I have been a credit card holder with your company for the last (number) years. My account is in good standing and I would like to continue using it. However, I would like you to consider giving me a lower interest rate on this account, or I may switch to a card with a better rate.

  3. Record the name of the person with whom you spoke, the date, your interest rate, and then a date six months later when you can make your request again. If they refuse to give you a lower rate, try again the next day to reach someone more helpful. After successfully lowering your interest rate, wait six months and ask again.

Table 5. 

Record of Lower Interest Rate Inquiries

Credit card

Phone number

Person you spoke to

Interest Rate

Date

Date to call again

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bankrate.com

Balance Transfers—Know What You Are Getting

Transferring a high-interest card to a card with a low rate can save a bundle of cash and speed up your path to lower your debt. But be careful. The rules are different for each card.

a. Check the time limit. Most interest rates last only 6–9 months, then revert to a more traditional rate.

b. Know what the interest rate really covers. Does it cover just the balances transferred? Many exclude any new purchases made. The credit card company will apply all of your payment to the zero or low-rate balances first, until they are paid off. That means your new purchases will continue to revolve on the card and rack up the higher interest cost.

c. Beware of the hefty fees. Most cards have a balance transfer fee. The cost varies, so check it out. You want to consider only those cards that have a cap on their transfer fees.

d. Watch out for the bait and switch. Just because you applied for the zero percent rate doesn't mean you'll get it. Card companies will sometimes issue you the card but assign a higher rate if your credit score is low. Be sure to READ the agreement terms that come with the card before you transfer a balance or make a purchase.

e. Always pay on time. The zero rate or low rate will disappear the minute you are late. The interest rate can be bumped up to high as 30 percent plus the late fee.

Table 6. 

Worksheet for Balance Transfer

OLD CARD

Toll-free # for customer service

 

Account #

 

Balance

$

APR

%

Grace period

days

Due date

 

 

NEW CARD

Toll free # for customer service

 

Account #

 

Balance

$

Introductory APR

%

Date introductory rate expires

 

Date balance transfer APR expires

 

APR after introductory rate expires

%

APR after late payments

%

Balance transfer fee

$

Annual fee

$

Grace period

days

Due Date

 

Remember, while a balance transfer is pending, continue to make minimum payments by the due date to the old card. When you receive a billing statement from the old card, make sure it has a zero balance.

A helpful online tool is PowerPay. This tool helps consumers organize their debts and make decisions about debt management, payoff schedules, consolidation, and how to most efficiently use additional funds to reduce debt. The program is available at http://www.powerpay.org. Your local UF/IFAS Extension agent can help you get your information organized and interpret the program results.

Footnotes

1. This document is FCS7231, one of a series of the Department of Family, Youth and Community Sciences, UF/IFAS Extension. Original publication date September 2008. Revised April 2013, May 2016, and March 2019. Reviewed [REVIEWDATE]. Visit the EDIS website at https://edis.ifas.ufl.edu for the currently supported version of this publication.
2. Joan P. Elmore, former Extension agent IV, UF/IFAS Extension Jackson County; Sarah M. Ellis, Extension agent I, UF/IFAS Extension Citrus County; Michael S. Gutter, associate dean and associate professor; and Travis P. Mountain, former lecturer, Department of Family, Youth and Community Sciences; UF/IFAS Extension, Gainesville, FL 32611.