Age of Credit is part of your credit score

At the time, I didn’t know how credit scores are determined. I thought that since I had an open line of credit that wasn’t being used, it would lower my credit score (too much available credit can be a bad thing). That was partially true, but I didn’t realize that the age of your credit history also affected your credit score.

That line of credit was open for 8 years, had a $1,000 limit, and I was never late or missed a payment. Besides that card, my newest lines of credit were another credit card and a car note, both of which were about a year old. Canceling that credit card reduced my average age of credit quite a bit, and there was no substantial benefit by reducing my line of credit by $1,000.

This chart breaks down the components of your FICO score.

Now I think it through before making moves that will affect my credit score

Recently, my wife received a new Discover Card to replace an expired card, but she forgot she even had this particular card in her name! It turns out she used the card when she lived with her parents and even though she hadn’t used the card for several years, it was still active. We looked into it a little bit, and it turned out she had a $15,000 limit on it. Add that credit limit to another Discover Card, a credit card through our bank, and a mortgage in her name (she bought the house before we were married and I was never added to the mortgage), and we found out she has a lot of available credit to her name! Time to reduce the amount of credit to improve her score!

We called customer service to cancel the card and while we were going through the process, I remembered that we shouldn’t cancel the card because your length of credit history affects your score. This card was about 12 years old, which is a very good age to keep on your credit.

Well, it turns out credit card companies don’t like to lose customers, so they transferred us to a CSR intent on keeping us as customers. In the end, we kept the card open and had it switched to the Discover Open Road Card which pays 5% cash back on gas purchases and auto maintenance, and 1% on everything else. The Discover Card rep offered to lower the credit limit to $1,000, which is the minimum line of credit you can have. This helped lower her available credit limit and should help improve her credit score. In the end, it worked out for both parties.

I need to look up our credit scores

Now I have a confession. I don’t know my credit score (or my wife’s). The last time I checked was a couple years ago when I bought my car. My wife hasn’t checked hers in about the same amount of time, when she got a mortgage.

One of the reasons I’ve written about credit scores so often lately is because I knew I needed to check ours, and I was interested in learning about it. I figured I might as well share what I learned. Now I just need to go get my free credit score. I’ll share more about this later.

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Your credit card bill is due on Tuesday, at the end of business hours – do you know where your minimum payment is due? If you think you might not even be able to make your minimum payment this month, here are some handy ways to get that money or at least mitigate the damage before your credit card payment is due:

Pick up a temp job

Temp jobs last only a few days and can get you cash fast. Your local temp agency, employment agency, seasonal work office, or employment office can generally put you in touch with someone who needs work done now and is willing to pay fast. If you can swallow your pride and work at a less-than-glam job for a few days, you can often come up with enough cash to cover your bills. And maybe you’ll have enough left over to stash in your savings, too.

Dip into savings.

If you have a savings account, this is the time to go in and take out enough money to cover the minimum payment. Just note how much you took out and as soon as you get your paycheck, replenish the funds. Try not to make early withdrawals from your retirement accounts though, because early withdrawal penalties will eat you alive.

Sell something.

Extreme? Not really. There are people who borrow against their paycheck one month, roll over the debt, and wind up thousands of dollars in debt. That’s extreme. This might be a good time to hold a yard sale to get rid of that junk you never use or a good time to put an ad in the paper to get rid of that atrocious love seat your Aunt Edna gave you. Most of us have homes and storage units filled with stuff we don’t use. Someone would love that stuff and would even pay you for the privilege of getting it out of your life.

Call your credit card company to let them know you’ll be late.

If you can’t scrape together enough change from the sofa cushions, if the temp job falls through, if your savings account has an echo due to terminal emptiness and if you haven’t a thing to your name you can sell, you need to let your credit company know the payment will be late. Calling may mean eating a tiny bit of humble pie, but it may prevent your credit card company from reporting you to credit bureaus. If you have a stellar record of payment, you can even ask for a few extra days and receive no penalties. It’s a slim chance, but well worth pursuing.

Take a reality check.

Plenty of people whine about not being able to make payments, even as they sit around sipping designer coffees or as they head out to the movies. If you have enough cash to pay for treats for yourself, you can pay that credit card bill, so get to it. You don’t want to become one of those obnoxious types who drives around in a BMW and complains about not having enough. Or maybe you do, but that’s another blog post.

Make sure it doesn’t happen again.

So maybe you sat around while the deadline for paying your credit card went by. Whatever happened this month, start working to ensure that this is the last month you have scrounge around for sofa pennies to make a payment. Start putting money aside, make a budget, rein in your spending, and make sure that you have enough money for everything important next month.

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Here is the question:

I am working on improving my credit score. Right now it is 577 from the 3 main credit bureaus. I am currently paying all my bills on time, but I was delinquent on some payments in February of ‘05. I paid them off in one lump sum and closed the accounts. Is it possible for me to call all three of the credit bureaus and have them take those off of my report?

I also noticed that the amount I currently owe is close to the maximum amount I can borrow. This month I took the money that I normally put in savings and I put it all towards my credit cards along with my usual credit card payments. Before I made these payments I had 13.55% of my available credit left and after I made my payments I have 22.26% of my available left. How long will it take for these payments to show up on my credit report and what is the ideal percentage of available credit to have left?

Thank you,
Josh

Josh, great question. You’ve done a few good things regarding your credit score, such as paying off your old credit cards in full and paying current bills on time. Now, your goal is to improve your credit score. There is no “instant cure,” but there are a few things that will help you improve your scores over time.

How FICO credit scores are determined

First, lets look at how FICO credit scores are determined. This chart breaks down the components of your FICO score by importance.

As you can see, these components carry different weights in your score. Based on your situation and questions, we will focus on a few of these. But keep in mind, each component is used when determining your score and they are all important.

Your credit payment history

Your payment history makes up 35% of your credit score. Since it is the largest component, we’ll look at it first.

You mentioned you had some delinquencies in February of 2005. Since then you’ve paid off the loans and closed the accounts. The good news is that you are current on all new accounts, and are even paying extra when possible. The bad news is that your delinquencies will remain on your record for at least 7 years, even though you have closed the accounts. Unfortunately, you can’t just call someone and have the old accounts erased from your record.

However, the longer you pay your bills on time, the better it will look on your credit report, and the older the delinquent loans are, the better. As long as you continue what you are doing, your score should improve.

Closing Lines of Credit

Closing the accounts you were delinquent on may have also had a negative effect on your credit score because it would lower your average age of credit and decrease your credit utilization rate (proportion of debt to available credit). The length of your credit history makes up 15% of your credit score, with older accounts having more weight because you have shown the ability to pay off loans over a longer period of time. If you need to close a line of credit, it is usually best to close newer accounts.

Decreasing the amount of available credit is not a bad thing in and of itself. In fact, reducing the amount of available credit can be both good or bad depending on your situation. If you have too much available credit, you can be considered a credit risk, and it can lower your score. In this case, reducing available credit can be positive.

On the other hand, reducing available credit can be negative if it leaves you with a high credit utilization rate. This can be perceived as a sign to lenders that you are living beyond your means and may max out new lines of credit.

Amount owed (Total amount owed and credit utilization rate)

The amount of money you owe lenders accounts for 30% of your credit score. This actually covers several topics including the total amount of money you owe as well as your overall credit utilization rate. You mentioned that you have 22.26% of your available credit remaining, which means your credit utilization rate is over 77%. That is very high and will have a negative effect on your credit score.

If you can afford it, pay extra on your credit cards to lower your overall credit utilization rate. You should probably start seeing increases in your credit score when you get your utilization rate below 50%, but ideally, you want to keep it below 30-35%. Keep in mind this is for all your available credit, not just one or two cards.

Alternatively, you may be able to speed this process up by calling your credit card companies and requesting an increased line of credit. This will instantly lower your credit utilization rate. Only do this if you are committed to repaying your debt and not because you want to charge more to your cards.

To answer your questions:

• No, it is not possible to have your old lines of credit removed from your credit score. They will remain in your credit report for at least 7 years. In some cases they can linger for 10 years.
• How long will it take for your new payments to show up on your credit score? It will probably take a few weeks, and maybe a month or two. The changes may be small at first because your credit utilization rate remains high. As you continue to lower your rate, your score should climb.
• Ideally, you want to shoot for a 30-35% credit utilization rate. You are currently over 77%, so it will take some work and time.

The good news is - you can improve your credit score

You are already doing a few very good things to improve your score, and as long as you continue doing them, your score will improve. The most important thing is to continue to pay your bills on time, every time. The second most important thing is time. Improving your credit score is a long term process.

For your situation, we looked at ways to improve your credit payment history (accounting for 35% of your score), age of credit (15% of your score), and amounts owed/available credit (30% of your score). Taking these steps outlined above and adding a little time will improve 80% of the components in your credit score.

To improve the other 20% of your FICO score, refrain from opening new lines of credit for the time being, and stay away from less desirable types of credit, including payday loans, retail credit accounts, and consumer finance accounts.

If you follow these steps, there is no reason why your credit score shouldn’t show signs of improvement. Good luck, Josh!

You can get a copy of your credit report free, through the MyFICO website, or from the three major credit bureaus - Equifax, Experian, and TransUnion.

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Yesterday I wrote about how FICO Credit Scores are determined. The calculation is based upon your credit payment history, amounts owed, length of credit history, new credit, and types of credit. Now I will share some ways to improve your credit score.

This chart breaks down the components of your FICO score by importance.

How to improve your credit score

The most important thing anyone can do is pay their bills in full on time, every time. In addition to paying your bills on time, these tips can help you improve your FICO credit score:

Payment History

Your payment history comprises 35% of your credit score, so it is important to make your payments in full and on time. Delinquencies will have a negative impact on your score, and any loans that go to collections can stay on your credit report up to 7 years or longer - even if they have been paid in full. There is good news though. The longer you pay your bills on time, the more positive the effect on your credit score.

To improve your credit score, concentrate on making your payments on time, every time. If you feel like you might have a problem meeting your payments on time, call your lender and try to work out an arrangement where they can get their money and it won’t affect your credit score. Some lenders are willing to work with borrowers when given the chance.

Amounts Owed

The amount of money you owe makes up 30% of your credit score. Lenders look at your total available line of credit and ask this question: “worst case scenario, how much money can they borrow, and would they be able to pay it all back?”

Some of the important factors to consider include the total amount of money owed, available credit, the amounts owed for each type of account (secured debt and unsecured debt), number of accounts with balances, proportion of available credit used, and proportion of installment loan remaining vs. starting balance.

To improve your credit score, the most important thing you can do is pay down your debt to reduce the amount you owe. Next, try to keep your revolving credit balance low (such as credit card debt). Another tip is to close or reduce available lines of unused credit. For instance, if you have an unused HELOC or other available credit line that you aren’t using, you may improve your score by reducing the amount you can borrow. However, be careful opening or closing too many accounts to try and raise your score - the opposite effect could happen if you make several major changes in a short period of time.

Length of Credit History

Lenders want to lend money to people who have consistently shown the ability to repay their loans. The longer you have proven your ability to repay loans, the more favorable you look in the eyes of the lender. The average age of your credit accounts makes up 15% of your credit score. Be careful opening too many credit accounts at once because that can lower your average age of credit. This is even more important if you have only recently established your credit history.

To improve your credit score, do not close old credit accounts. If you do not need the line of credit any longer, ask the company to reduce the available line of credit to the minimum and cut up the card and don’t use it anymore. This reduces the temptation to continue using the card, but you retain the benefits of keeping the old line of credit in your credit history. If the line of credit is newer, it may not hurt to close the account.

New Credit

New credit makes up 10% of your credit score. Too many recent credit inquiries can also have a negative affect on your credit score.

To improve your credit score, try to do all your interest rate shopping in a short period of time. For example, if you are shopping for a mortgage or car loan, try to do it all in the span of a couple weeks instead of dragging it out over months. Checking your own credit score will not have a negative impact on your scores if you get a copy of your credit score from an authorized agency such as the three major credit bureaus - Equifax, Experian, and TransUnion, or from MyFICO where you can get all three at reports once. MyFICO is also the company that created the FICO credit score.

It is important to note that it is OK to open new lines of credit if you need to reestablish your credit history, just be sure to pay off your new loans on time. Try to limit the number of new credit accounts you open in a short time period.

Types of Credit

There are several types of credit, and lenders like to see that you have the ability to handle them equally well. The types of credit you have makes up 10% of your score.

To improve your credit score, try to maintain a mix of installment loans (such as a car payment or mortgage) and revolving credit (such as a credit card). This shows lenders you are capable of making regular fixed payments, as well as maintain the ability to regularly make charges and pay them off. Having a mixture of secured and unsecured loans can also affect your credit score.

There is no quick fix to improve your credit score

But there are many things you can do to improve your score over time. The most important thing is to make regular payments and to reduce your amount of debt. You can also consider consolidating accounts, reducing the amount of available credit you have, leaving your oldest credit lines open, and having different types of credit (installment loans, revolving credit, secured loans, unsecured loans, etc.).

Keep in mind that closing your credit accounts does not remove them from your credit report or your credit score. Closing the accounts is fine, but you have to consistently pay your remaining loans on time to improve your credit score.

Finally, only open new credit accounts when needed. This will limit the amount of available credit you have, reduce the number of new accounts in your name, and help keep the average age of credit up - all of which are important elements to your credit score.

You can get a copy of your credit report free, through the MyFICO website, or from the three major credit bureaus - Equifax, Experian, and TransUnion.

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The best place to get this answer is to the myFICO website, which is a division of Fair Isaac, the company that created the FICO credit score. The FICO credit score is considered the benchmark credit score, as over 90% of banks use FICO credit scores when pulling a customer’s credit score.

MyFICO is also the only place to get a copy of your credit score from the three major credit bureaus - Equifax, Experian, and TransUnion.

This chart breaks down the components of your FICO score.

Payment History - 35%

Your payment history is the largest component of your credit score. Lenders want to know your past performance for paying off your loans. Lenders are interested in the type of loan you had, such as a credit card, mortgage, installment loan (a loan with a fixed number of payments, like a car payment), consumer finance account (generally considered a lower tier type of loan made by companies who generally lend to higher risk individuals), etc. Lenders are particularly interested in these other factors as well:

• Number of accounts fully paid per agreement with the lenders.
• Bankruptcies, judgments, lawsuits, liens, wage garnishments, delinquencies, bills that have gone into collection, or other negative signs that you may be a credit risk.
• How long overdue you were on your payments.
• How much you were past due on your bills or collections.
• How recent these delinquencies or negative marks occurred.
• Number of past due items on file.

Amounts Owed - 30%

In addition to the types of loans and your payment history, lenders are concerned with how much money you owe. Even if you have a perfect credit record, there is a limit at which lenders will probably not lend you any more money - simply because your debt to income ratio doesn’t support lending any more money to you. These factors are considered for your FICO score:

• Amount owed on all accounts
• Amount owed on specific types of accounts (secured vs. unsecured, etc.)
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits)
• Proportion of installment loan amounts still owed (remaining balance vs. original loan amount)
• Lack of a specific type of balance, in some cases

Length of Credit History - 15%

Lenders prefer lending to people who have consistently shown they can handle credit in the past. Chances are they will be able to handle making payments in the future. Some of the factors that make up your FICO score are:

• Time since all accounts opened
• Time since account opened, by specific type of account
• Time since account activity

New Credit - 10%

New credit refers to how much credit you have taken out recently. Lenders may become concerned if you have recently applied for thousands of dollars in loans and continue to request more lines of credit.

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems

Types of Credit Used - 10%

Types of credit include credit cards, retail credit accounts, mortgages, installment loans, and consumer finance accounts.

In addition to the types of credit, your FICO score will also encompass the number of each type of credit, how often they are used, and any recent information for them.

Additional factors affecting your credit scores:

It is important to remember your FICO score takes all of these factors into account, not just some of them. Your credit score will take into account both the positive and the negative information from your credit report. However, it is possible to raise your FICO credit score over time by establishing a good track record.

Note: If you have only recently established credit, your weighting may be slightly different because you have no established credit history.

Lenders look at more than just your FICO score. Your FICO score is only comprised from information found within your credit report. Lenders, however, look at many factors when making a lending decision, including income, current employment situation, type of credit being applied for, and more.

Keep your credit score high. Your credit score can have a big effect on your life. Having a good credit score is important.

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Here is the question:

I am trying to decide what to do maybe you can help me decide. We have three credit cards with a low limit on all but they are maxed out and we are accruing late fees every month, sometimes over 30 days! I thought I should pay those off but on the other hand my husband’s car loan has a super high interest rate and I know we really need to get rid of it so I thought we could trade it in and put the $1800 towards a down payment on something new.

I just can’t decide what to do!!!

Thanks, K.

K., thanks for your question. First, I want to let you know that I am not a financial professional, so I can’t and won’t tell you exactly what you should do. But I can make a some observations about your situation. In the end, you need to do what you feel is best, or consult with a financial professional.

What we know about the debt situation:

1. 3 maxed out credit cards with low limits
2. Regularly accruing late fees.
3. High interest auto loan
4. $1,800 rebate check.

What we don’t know about the debt situation:

1. Interest rates
2. Loan amounts
3. How much late fees cost
4. Other debts, bills, expenses, etc.

Where should we start?

Facing a mountain of debt is never an easy task. It can be confusing deciding where to start and how to attack it. Thankfully, there are a lot of great resources that can help you make these decisions.

Recently, a group of bloggers, including myself, wrote an series based on the teachings of Dave Ramsey, who specializes in getting out of debt, staying out of debt, and planning for a prosperous future. The lessons we wrote about are known as his Baby Steps to Financial Peace. Reading the entire Dave Ramsey’s Baby Steps series is a good place to start to get some great ideas on how to get out of debt and become financially free. I will summarize a few of the steps that are most applicable to your current situation.

No more debt, get current, and build a budget

Make the decision to eliminate your debt. You and your husband have already decided to do this. Congratulations! Making this decision is the first step to getting out of debt. Without making the decision to change your old habits, you would remain in debt indefinitely. Now you need to form a plan on how to get out of debt and stick to it!

Get current on your debts. You mentioned paying regular late fees on your credit cards. Late fees run about $30 or more each and will eat you alive! If you are paying three different late fees per month, you are probably adding an additional $100 per month on top of a payment you are already struggling to meet. That is $100 per month that could be used to pay down other debts, such as eliminating the credit cards completely, or paying down the car loan more quickly.

Understand your financial situation - start with a budget: The most important thing you and your family can do at this point is understand your financial situation. Starting with a budget is a great way to do this. My friend Lynnae wrote a great primer about how to build a budget for the first time, and another friend Glblguy wrote a more detailed explanation of how to make a budget. There are many tools you can use to help you make a budget, but if all you have is paper and a pencil, that will work fine. You just need to do it.

Start an emergency fund

Once you are current with your loan payments, you need an emergency fund. An emergency fund can be used for many things - the most important of which is to give you a financial cushion to help prevent the need to borrow more money when a large, unplanned expense comes up. These can include car repairs, medical expenses, homre repairs, sudden loss of a job, etc. The recommendation is to start with a $1,000 emergency fund, then start working on repaying your other debts.

Read more about emergency funds.

Pay off all your debts using the “debt snowball”

Dave Ramsey coined the term debt snowball, which refers to his method of paying off your debts. Start with the smallest debt and when you pay it off, add the amount you were paying for that loan to the payment you are making on your next smallest loan. When that debt is repaid, repeat the process. The key is not to reduce the payments you are already making, so each time you pay something off, your debt payment gets larger and larger - much like a lot of little snowflakes add up to make… a snowball. One snowflake isn’t very powerful, but a lot of them together are powerful.

For a more in depth, and excellent explanation, read Pay off debt using the debt snowball. PaidTwice also wrote a great article about Snowflaking, the act of seeking out little ways to find extra money to put toward your bills. This can be an incredibly effective way to more quickly reduce debt.

These steps are a great place to start your debt reduction

You mentioned your tax rebate will be $1800. That will probably be enough money to start on these steps.

Get current. As I understood your situation, you have 3 maxed out credit cards with low rates, fairly regular late payments on those cards, and a high interest car loan. Based on that information, and the information from Dave Ramsey’s teachings (and other financial professionals), it seems like the best thing to do would be to get current on your credit cards to avoid paying late fees. Then redirect that money toward paying off your other loans.

It may be best to pay off all the credit cards if possible, or it may be best to pay off one completely, cut it up, and use the money you were spending on that bill to “snowball” toward your other cards. You can also get current on your payments, then use the remaining money to start an emergency fund. There are probably several ways you can handle this effectively.

No new car. One thing I don’t think anyone can recommend is buying a new car. First, you can’t fix debt with more debt. The math doesn’t add up. Second, if you have been making frequent late payments on your credit cards, your credit scores are probably low right now, which means that buying a new car will entail another loan - probably at the same rate as your current car loan rate, or even higher! Because you still owe money on the car you would be trading in, you will just add the money you owe to the cost of your new car, making your payments much larger than they should be, and stretching them out longer than necessary.

A great opportunity for change. This tax rebate can be a real blessing for you and your family, and give you the opportunity to catch up on your late payments and avoid having to pay more of them in the future. The important thing to remember is to make positive changes and try to avoid taking on more debt. If you pay off a credit card, consider cutting it up and don’t use it again.

Good luck. K., I wish you and your family the best of luck in slaying these debts.

Reader comments? If any readers have any comments about how they would do this differently, or if you have other ideas or words of encouragement, I invite you to leave them in the comments section.

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Why get a HELOC?

A HELOC is a great way to have an available line of credit whenever you need a large amount of money. Many times the HELOC loan rates are better than credit cards because the debt is secured by your home equity (translation – if you don’t pay it back, your home could be on the line). Credit cards are unsecured loans and generally have much higher rates.

Many people use HELOCs to pay for home improvements, debt consolidation, or as a ready source of cash for an emergency fund. However, I don’t recommend using a HELOC as an emergency fund unless it is absolutely necessary. It’s best to have an actual cash emergency fund.

In many states, the interest payments for a HELOC are tax deductible (up to $100,000). This lowers the effective interest rate you pay on the loan. AMT rules or other laws may interfere with your ability to claim this deduciton; do your research before borrowing with the assumption you can deduct interest payments.

Things to look out for with a HELOC

The interest rate on a home equity line of credit is usually variable and based on an index such as the prime rate plus a margin (the prime rate is the rate at which banks can borrow money). This means your interest rates can and likely will change. If your loan has a long amortization schedule, be prepared to have your payments change several times over the course of your loan.

The HELOC often comes with an annual fee, which is something you need to consider. Many times this fee is not disclosed, or is in the “small print.” Be sure to ask before signing any paperwork.

Your HELOC is secured by your home equity. That means if you do not pay your loan back, your home could end up in foreclosure. You should also be of your home’s value and how much equity you have. It is not wise to borrow more money against your house than your house is worth.

Do not borrow money with a HELOC just because a banker or lender says you can. Just because a lender sells you on the idea that you can tap your home’s value for a loan doesn’t mean you should. Only take out a HELOC because it is the best option for your situation.

Over the last few years real estate values increased dramatically and people used their home’s increased value as an excuse to upgrade their lifestyle by borrowing money they couldn’t afford to pay back. A vacation or a new car is not a good reason to borrow against your house. 

Used correctly, a HELOC is a great financial tool. Used incorrectly, and you could be betting the house.

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Don’t get me wrong, I have nothing against credit cards, and I think there are many reasons to use credit cards. In fact, many people actually make money by using rewards credit cards. But for a credit card company to pay me that money, it has to come from somewhere. That money comes from the killer fees they charge.

Credit card companies are always creating new and innovative methods of extracting fees from their customers. I haven’t seen raw numbers, but I would venture to say credit card companies make the majority of their money from miscellaneous fees, penalties, and other charges they assess their customers. I’m sure the credit card companies don’t want to make these numbers readily available if they are not already.

Credit Card Fees to Avoid

Application and Annual Fees: You want me to pay you for the honor of applying for your card, then you want me to pay you an annual fee for the privilege of using said card? No thanks! Not when I can use a rewards card and have the credit card company pay me! Avoid these fees by only applying for cards without annual fees or application fees, or ask for the fee to be waived.

Sky High Interest Rates: There is no federal law to limit interest rate charges; those laws are covered at the state level. In fact, many credit card companies incorporate in Delaware or other states that have a high interest rate ceiling or none at all. This allows them to charge such high rates! Avoid these fees by paying your bill in full every month.

Double-Cycle Billing: Some credit card companies have found a way to charge more interest to their customers and force them to pay interest for debt they have already paid! Double-cycle billing, also called two-cycle billing, charges interest for the average daily balance for two cycles: the current cycle, and the previous cycle. With this practice, credit card companies can charge their customers for debt they have already paid. Avoid these outrageous fees by paying your bill in full every month and shopping for a card provider who doesn’t charge these fees. No one should have to pay interest twice.

Universal Default Interest Rate Ladder: The Universal Default Interest Rate Ladder raises your interest rates to a ‘default’ level when there is the perception that lending money to you takes on a higher amount of risk for the credit card companies. Credit card companies regularly screen their current customers’ credit reports for universal default triggers which may include exceeding your credit limit on another card, a single late payment any debt, a decline in your credit score, a high debt utilization ratio, adding additional lines of credit such as a home mortgage or auto loan, or even applying for more credit, whether it is approved or not! The universal default rate can cause your interest rates and payments to skyrocket! The worst part is, you won’t even know it was applied until you get your next bill. Avoid these fees by paying all your bills on time, maintaining a good debt utilization ratio, and not exceeding your credit limits.

Late Fees: According to Consumer Action, a California consumer group, late fees averaged $28 per month in 2006. The highest was $39. That is a lot of money to add to a credit card bill - especially because the person receiving it likely can’t afford it in the first place. Also, pay attention to your due date. Credit card companies have been known to change them without notifying their cardholders, resulting in late fees and higher interest rates. Avoid these fees by paying your monthly bill on time.

Cash Advance Fees: You know those little checks your credit card company sends you in the mail every month? They aren’t the same as swiping your card. You have to pay a 1-3% fee each time you use these checks, and pay the interest if you don’t pay them off in full! You can also get a cash advance at an ATM machine. Avoid these fees by not using the checks or a cash advance from an ATM. Shred the checks as soon as they arrive, or better yet, have the credit card company stop sending them to you!

Balance Transfer Fees: Sometimes you can transfer your existing credit card debt to a card with a lower APR. This can save you a lot of money in interest payments, but it may cost you 1-3% of the balance transfer or more. Some companies cap the charge, and others have a minimum charge. Avoid these fees by asking them to waive the fees, or using a card that doesn’t charge balance transfer fees.

Over the Limit Fees: Oops! You went over your limit! That’s too bad, because not only did that cost you about $20-40 dollars in over the limit fees, but it may have triggered the universal default interest rate ladder - which may affect the interest rates you pay on other credit cards. Avoid these fees by keeping track of your credit limits and utilization and don’t exceed your balance.

Rate Jacking: Apparently, some credit card companies add some small print to the agreement you sign that gives them the ability to raise rates, “just because.” They sometimes give you the option to opt out, but this requires action on your part. Thanks to Debt-FREE Revolution for bringing rate-jacking to my attention.

Avoid credit card fees

Most of these fees can be avoided by paying your balance in full every month. If your are working your way out of debt, then the best way to handle these killer credit card fees is to read and understand the fine print in your cardholder agreement and act accordingly. If there is something in the agreement you don’t like or understand, don’t apply for the card.

If you already have the card, you have to be diligent to make sure your actions don’t cause these extra fees or penalties. You can also try contacting your credit card company to try and have some fees reduced or the terms of your contract changed. This may work once or twice, but I wouldn’t rely on this as a long term solution.

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It appears as though the settlement amounts for the class action lawsuit - Foreign Currency Conversion Fee Antitrust Litigation (MDL 1409), have been announced. The tentative agreement by the defendants is to pay $336M to settle claims and pay attorney fees.

Are you eligible for a settlement? If you made a transaction (purchase, cash advance, cash withdrawal or internet transaction) in a foreign currency on a Visa-, MasterCard- or Diners Club-branded credit, charge or debit/ATM card issued in the United States at any time from February 1, 1996 to November 8, 2006, you may be a member of the Settlement Damages Class. This does not mean you had to leave the country, only that you had to make a transaction in a foreign currency, including on-line purchases.

There are 3 claim options:

Refund Option 1 - Request an Easy Refund of $25. This Option is recommended if you traveled outside of the U.S. for less than one week or had foreign transactions of less than $2,500 using your eligible cards during the 1996 to 2006 period. (Green Form); OR

Refund Option 2 - Request a Total Estimation Refund based on typical spending during travel and your answers to a few questions about your own travel outside of the U.S. This Option is recommended if you traveled outside of the U.S. for more than one week or had foreign transactions of more than $2,500 using your eligible cards during the 1996 to 2006 period. Refunds will be a maximum of 1% of estimated foreign transactions. (Blue Form); OR

Refund Option 3 - Request a refund based on information that you provide concerning your Annual Estimated foreign transactions during the 1996 to 2006 period. This Option is recommended if you had extensive foreign travel or foreign transactions and are willing to provide year-by-year information. Refunds will be a maximum of 1% to 3% of foreign transactions. This is the only Option you can use to get a refund for corporate card use. (Red Form)

Final approval of the settlement has not yet occurred. The hearing for final approval of the settlement is scheduled for March 31, 2008, and the deadline for filing a claim is May 30, 2008.

Our situation: My wife and I lived and traveled extensively outside the US during this time period while serving in the military. We just received the claim form in the mail, and need to decide what to do.

Which option should we choose? We can choose Option 1 ($25), or Option 2 (an estimated claim).  We do not have accurate records for this time period so we will have to consider out roptions carefully. There are pros and cons to each.

Option 1 - quick, easy, pretty much guaranteed. Maxes out at $25.

Option 2 - more work, longer claims processing, not guaranteed. Could return more than $25.

I will have to do some research to determine how much work it will be to do Option 2, otherwise, Option 1 will be fine. This is money we weren’t expecting, and we don’t need it to pay a bill, so it is a nice benefit. Depending on how much work it is, I may just take the automatic $25. I’m going to think about it this weekend, and try to find supporting paperwork.

Which would you choose?

For more information go to the Currency Conversion Fee Settlement page or the FAQs.

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This week is the Making Progress Edition, because even though a couple people sent in articles about a recent setback, every article had one underlying theme - progress is being made on slaying the debt monster. Even those who noted a change also wrote about how they were going to handle it. That is the kind of news I like to hear!

I’ve done my best to arrange these in a logical manner so the readers can find topics more easily. I’ll lead off with my Editor’s Choices. These are my favorite selections from the carnival this week. I think they are well written, provide a service, or are just plain entertaining.

Editor’s Choices:

• Ann Hartter from Saving Advice presents How to Make Your Credit Card Less Useful. This is one of my favorite articles this week. The premise? Do something to your credit card so you can’t use it. Some of the recommendations are quite useful, and I highly recommend watching the video at the end!
• The Happy Rock presents Finance Tool : Debt Snowball Calculator. This is a cool little tool that can help you determine the best (mathematical) way to pay off your debts. Sometimes though, it is better to go with the debt snowball solution, and pay off debts in a slightly different order - just to give you a better piece of mind.
• Golbguru, from Money, Matter, and More Musings presents Will You Spoil Your Children If You Give Them Substantial Economic Gifts?. This article is not 100% about debt reduction, but more about debt prevention and financial accountability. An interesting quote (in relation to parents providing for their children): “The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.”

Budgeting and Planning: Having a plan is the easiest and most efficient way to get out of debt. These articles can help you along your way to making a better plan, or learning how to deal with a plan that has gone awry.

• Mike from The Financial Blogger presents A different type of budget. He writes: “I present the way I am making my budget. Since the world of personal finance is constantly evolving to a bigger and more complex creature, I thought that the regular budget with 2 columns (expenses/revenues) was not sufficient. In fact, we are now receiving different types of income at different intervals.” Mike brings up a great point - everyone’s situation is different - find what works for you! And check out his article to see how he is doing it for his situation!
• paidtwice, from I’ve Paid For This Twice Already…, had a change in her work situation which will affect her and her husband’s accelerated debt repayment plans. Read about their current situation and how they plan to deal with it in her article, And Then Everything Changes.
• Ryan Russell at CareOne Credit Counseling presents Map Out Your Financial Future. He writes: “Create a map of your financial transactions and you’ll see where your money actually goes each month. Preparing a monthly set of personal financial statements gives you the information you need to effectively manage your finances and improve your financial status.” Solid advice!

Pay off Debt or Save? This is a popular question, and one that doesn’t always have one correct answer. These two posts will give you a couple ideas that may be applicable for your situation.

• Green Panda at Green Panda Treehouse presents Pay Off Debt First or Start Savings (Chicken or the Egg). Which came first the chicken or the egg? Should you save or should you aggressively pay down debt? Find out what Green Panda thinks.
• FMF from Free Money Finance presents Issues Not Usually Addressed When Discussing Paying Off Home Debt. The eponymous question is asked, “Should you prepay your mortgage, or let it ride?”
• ispf from Grad Money Matters presents Some Thoughts on Debt Aversion and Employee Stock Purchase Plan. I’m in the same boat as ispf… I have a strong aversion to debt and do everything I can to get rid of it quickly!

Reducing Expenses to Kill Debt: These are a few great ways to free up some cash that can be used to kill your debt! The important thing to remember though, is to use your extra funds to pay down your debt, not buy more stuff!

• Exjackly presents Leasing a New Car Makes No Sense. He writes: “As we all know, minimizing our expenses is the easiest way to be able to work on our debt reduction goals. Since automobiles make such a large part of our expenses, reducing the cost of the car is important for our budgets. Examining the cost of leasing vs buying it becomes clear that buying (used especially) is the best way to go.”
• Debtdieter from Debt Diet, presents Do You Get What You Pay For?. Debtdieter advocates purchasing generic goods to cut down on expenses - which can increase the amount of money one can funnel toward paying of debt! Great advice!

Bankruptcy: The dreaded “B” word. No, not what you’re thinking! Bankruptcy should almost never be considered your first option. These two articles tell you why.

• David from My Two Dollars presents Why You Should Avoid Bankruptcy When You Spend Yourself Into Debt. David wrote a nice article here that has to do more with being accountable for your actions and learning from your mistakes than it has to do with the emotional and financial aspects of declaring bankruptcy. And I agree with David here - too many people look for the easy way out.
• Kim Staudenraus presents Bankruptcy Truth. This article nicely compliments the previous article - it deals with the financial and emotional aspects of declaring bankruptcy.

Personal Situations: I admire anyone who has the courage to tell their financial story to other people. These people are making progress, and they want to share their story. Thanks for sharing, and good luck meeting your goals!

• Lynnae from Being Frugal shares her public declaration - No New Debt! in the article, October - The Final Numbers and a Public Declaration. Good luck, Lynnae! I hope you do it!
• Amanda from Me Vs. Debt presents Goodbye 30% APR. She states: “This outlines my problems with a high interest rate and an alternative to paying it. At the end it describes how my rate was finally lowered after the balance had been paid off.” Note: There are a few strong words in this article.
• Patti from 2nd Grade Teacher presents Stop This Train!. Patti shares some of her experiences and the progress she is making on her journey out of debt. Patti, I think you’re doing a great job! Keep it up.

Miscellaneous: These articles didn’t quite fall into a neat category, but I think they are definitely worth sharing and worth reading.

• Emergencies: Adam from Where Your Treasure Is presents Is It an Emergency?. Does your current situation warrant a dip into your emergency fund?
• Consumer Protection: Randall at Credit Withdrawal presents Paperless Statements and Pitfalls to Look Out For. Check you statements often - you never know when a company is going to try and pull a fast one on you and raise your rates with little to no notice!
• Debt Free is the way to be! Mandy from Frugal Dollar presents Clearing out the Clutter. This article relates household clutter to debt. And it’s true - once you clear things out, you have a fresh perspective on the world around you.
• Trivia: Did you know that in the US, you can pay any debt with legal tender? That includes paying a $12,000 tax bill with dollar bills and coins! (both articles previously published at Cash Money Life, but included for a little trivia fun!).

Thanks for reading, and a BIG THANK YOU to all of this week’s contributers. Thank you for sharing your article to help others get out of debt!

Do you want to participate in next week’s Carnival of Debt Reduction? If so, Submit your blog article to the next edition of Carnival of Debt Reduction using the carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

photo credits: Debt photo (woodsy), budget (linusb4)

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