New credit card rules in effect today

Today's a day credit card holders should celebrate. It's also one we should fear.

Strong new rules to protect consumers from predatory banks kick in today. As of now, it's illegal for your credit card to:

• raise your interest rate for no reason;
• raise your interest rate because you're late paying a different company;
• raise your interest rate on new purchases in the first year you have the card;
• play games with your monthly payment due date;
• cut your credit limit then slap you with a penalty for going over;
• charge you an extra fee for paying by phone or online;
• issue cards with fees more than 25 percent of your balance.

Maybe the biggest change is that credit card companies now must tell you how long it will take you to pay off your balance if you pay the minimum. So if you're paying 18 percent on a $5,000 balance with a minimum monthly payment of $150, your lender now has to tell you that it'd take nearly four years to reach a zero balance.

Those are all good things, but now for the worrisome part: All the changes are going to cost the credit card companies billions in revenues, so they're likely to cook up some new tricks. Credit card companies are expected to keep dropping customers like they have been over the past year, to raise rates overall and start charging annual fees.

How she got out of debt - 3 times

Yesterday, I gave an encouraging update on a reader who is taking my $0 Balance Challenge has has paid off nearly 50 percent more of her credit card debt in three months than she planned to.

Today, I want to share the story of a personal friend who, having read about the challenge, wanted me to use her as an inspirational example. She asked that her name not be used, but a few things I can tell you is that she's a single, professional woman with a solidly middle-income lifestyle who worked hard to rack up credit card debt and harder to get out of it.

Here's the rest in her own words:

I have always had an up-and-down relationship with money, including 3 rounds on the credit card merry-go-round. When I graduated from college in the mid-1980s, I was blessed to have no student loan debt. But I succumbed to the lure of easy credit cards. The first round wasn't too bad, and it only took a year to pay them off.

Then came the 1990s. I got my dream job and, thanks to a series of promotions and bonuses, I was flush with money. Back came the credit cards and large debt. I enrolled in Consumer Counseling Credit Service, and this time, it took three years to pay them off. At that point, I swore off credit cards and actually lived within my means. My only debts were my car (a reasonable car with a reasonable payment) and my mortgage.

Then in 2005, I found out two things: one, I eligible for a nearly $12,000 credit limit with 2 credit card companies; and two, I became pregnant. You can almost guess what happened next. I used the credit cards to take care of things while I was on maternity leave. The next thing I know, I was $10,000 in debt. I left my job to take another that came with a $10,000 pay cut. So in March 2005, I called CCCS again and joined the program.

The program had changed since the last time, and I had access to some great tools to help me stay on a budget and learn how to better spend -- and save -- my money. I made my last payment in December. This year, I managed to buy nice -- but modest -- Christmas gifts without having to break out the plastic. Not that I could, because I don't have plastic anymore.

My plan now is to double my car payments and have that paid off by the end of the year. I have a nice little rainy day fund, and have no plans to get another credit card anytime soon, despite the best efforts of credit card companies to tempt me. I have just called to opt out receiving any future offers. Can I add how amazed I was that even while in debt and the tight financial markets, credit cards were still trying to woo me?

I won't say the process was easy. I decided to be aggressive and pay $500 a month to get rid of my debt faster. I worked with the non-profit CCCS to negotiate my credit card interest rates. I had to learn to live on -- and stick to -- a budget. I had to tighten my belt and cut out some of the things I really enjoyed. But I kept my eye on the prize and once that car payment is done, I'll be completely debt free. I have a retirement to fund and a child to get through college.

And please -- don't tell me you can't live without a credit card. I have been doing it since March 2005. I've bought plane tickets, rented cars, paid for hotel rooms and handled everything else using only my debit card.

I paid 99 cents to download the Big Spender app on my iPod Touch and I'm tracking EVERY penny I spend in 2010. You can follow my adventure at http://spender2010.livejournal.com/. Sometimes you need to actually see where the money is going, people!

I challenge all of you, Keith's loyal readers, to make becoming credit-card free and getting your financial house in order a priority in 2010. Cheers!

Pay more than the minimum on your credit cards

Today, an update to the $0 Balance Challenge:

Last October, a reader wrote in that her goal was to eliminate $8,157.48 in total debt she had on two credit cards over in twelve months. Not an easy goal given the payment arrangement she worked out for both cards has her sending in only $200 a month; at that rate, she'd have paid $2,400 in 12 months with some percentage of that being eaten up in interest payments.

Three months in, though, there has been progress: I've managed to pay off a little more than $1200 and I'm quite excited. Still, I have a long way to go and staying focused on paying down the cards is quite challenging. For the past few months I've stuck with the minimum payments but when I get "extra" money, usually from baby-sitting or freelancing, I always some put money towards the cards. I've put the most money towards the card with the highest interest rate.

Plan for 2010: Increase my minimum payments from 80 per month to 120 per month on card #1. Commit to contributing a set percentage of "extra" money to paying down the debt on top of regular payments. I'm not sure how much of my "extra" income should go to paying down debt though, guess that's something to think about.
First, CONGRATULATIONS! By finding a way to pay more than the monthly minimum, you've eliminated in three months what it would have taken you six months to pay. That's wonderful and it shows how one of the most important principles of paying off debt works: pay more than the minimum.

Paying more than the minimum on your credit cards not only means you'll get the debt paid off faster, but it saves you money by eliminating interest payments from the end of the loan. Remember: any interest you pay is compounded and tacked on to every monthly statement. That means the longer you take to pay off your credit cards, the more you're going to pay in interest.

As far as how much extra you should pay each month, pay what you can afford. Freelance income isn't necessarily steady, so don't budget for the same amount every time. That said, pay as much of that money to the card as you can afford to, but make sure you save at least 15 percent of it in a separate account so you don't wind up like I did: a $0 Balance on my credit card but a big tax bill.

Beware of debt consolidation schemes

As the $0-Balance Challenge goes on, I'm getting more questions from people who are committing to paying off their credit card balances and want to know the best way to go forward. Like this:

I'm in the process of eliminating my credit card debt. I don't use the cards anymore and I recently set up payment plans. I hear about these services that consolidate all your debt so you only pay one "low" amount a month. Seeing as though I'm paying off two credit cards and student loans, is something like that worth looking into or should I keep doing what I'm doing?

I'll answer your question with a slogan I saw on a bus billboard the other day. It said, "Danger. Debt consolidation could cost you your home." It was a warning about scam artists who target people in trouble with their mortgages with 'consolidation loans', but I think the DANGER message applies to ads about credit card debt consolidation every day on the sports talk station I listen to and I shudder.

Why? Because what most people don't know about these operations is that many of them are owned by the very credit card companies they claim to be helping you get out of debt with. Think about it: how else would some random company or 'nonprofit' be able to negotiate a settlement on your behalf with a behemoth bank? And that's just in the best case scenario; in the worst case, debt 'consolidators' are pure, outright scams who will take your payments and never turn over anything to a credit card issuer or worse: steal your personal information and perhaps make your credit worse.

While there are a few legitimate debt consolidators out there, the truth is most people don't need them. Unless you're buried under so much debt it's impossible for you to get out (in which consolidation wouldn't help but Chapter 7 might), you don't need a third-party to consolidate your debt. If you've already set up a payment plan with your card issuer that's affordable, stick to it and remain disciplined about not using the card any further. That pays off in the long run without the worry of being scammed.

image: freedigitalphotos.net - Michelle Mieklejohn

Coming in 2010

Hey, everybody! Sorry it's been a minute since I posted. The good news is I've been spending a lot of time planning what this blog will look like in 2010. Here are a few things you should look for:

More social, more Q&A
After experimenting with posting questions on Facebook and Twitter, I've decided the best approach to interaction is to let you ask the bulk of the questions. After all, you know what your biggest financial concerns are. I'll still be available for you to follow and ask me questions on Twitter but I'm also going to be using a new social tool called Formspring. Bookmark my page and leave your personal finance or economics questions for me to answer anytime. The best will wind up as blog posts here.

For the love of money
I don't know if it's because I'm in my early 30s and everyone I know is confused about cash and coupling, or if it's simply a sign of the times, but at least half of the questions people ask me concern how to handle money in relationships. Since there's so much interest in the topic, I've decided to make it an area of focus on the blog in 2010, putting it right up there with my $0 Balance Challenge. So if you're trying to figure out how to get your money and your honey together, this is the place to be in 2010.

Getting and staying debt-free
Speaking of that Zero-Balance Challenge, I plan on expanding and developing it in 2010. You'll see me partner with other bloggers and institutions to give you the best advice, support and information on how to reduce your credit-card debt to zero and keep it there. We'll also be selecting a few readers to tell their personal stories of how they got out of debt or stayed there. Check in often and keep that plastic in your pocket.

image courtesy of freedigitalphotos.net

Jacked up rates: Reason #1 to pay off that credit card

When I decided to challenge you to get rid of all your credit card debt, I had no idea that the banks would hand all of us a built-in motivator. But they have: jacking your interest rates up sky high for no reason.

Months ago, a few stories warned that these kinds of rate hikes were coming but at that time I didn't know anyone it'd happened to. But now? Just this morning, I asked the question on Twitter and within three minutes, three of my followers said that their card issuers had jacked up their rates without warning and with little explanation.

That's not counting the real-life people I know: one whose rate was kicked up 14 percentage points though he's paid on time for four years; another with a FICO score above 800 who got a note saying her rate was climbing to a whopping 37 percent. Yes, 37.

I point all this out to answer the question I got from friend who wanted to know if he should pay off his $1,300 Citibank Visa balance. Though he recently lost his job, he and his wife have significant savings. Should he pay the balance off completely or pay half of it?

In most cases, I'd argue pay just the half: the balance isn't that high and being unemployed, you want to preserve cash. But with banks killing cardholders with rate hikes, keeping any credit card balance that you can otherwise pay off is too risky, especially if you have enough cash on hand to pay it off and still have significant savings left over. Since your wife is still working, cut back on other kinds of discretionary spending and make the single income work for as long as you can while looking for a job, but pay that balance off!

And that goes for the rest of you: this is NO time to be keeping a credit card balance. The banks have shown that their bottom line is the bottom line. They've taken all the bailout money we gave them from our taxes and paid us back by taxing us more via higher interest rates. They ain't playin', nor should you be.

A freeze on credit card rate hikes?

How would you like it if your credit card rates were frozen so that your card issuer couldn't raise them for a few months? Most of you would love it, I'm sure, especially if you're taking the Zero Balance Challenge or if you're like the guy who wrote me last week about his credit card jacking up his rates:

I'm usually good about knowing how much interest I've accrued on a credit card in a given month. So when the balance of a card I've been furiously paying down was about $6 more than I expected, I wondered what was going on. It was too much for it to be simply that an introductory rate had disappeared.
Come to find out my APR had been increased. That one went from 15.40 to 21.74. According to HSBC, which holds the card: "Your interest rate structure is changing because everyone that has your current interest rate structure is being increased to the pricing terms listed below."
I can exercise my right to reject the changes before 12/09/09, but, as of my last statement, they're there.
I have another card that I've now been told had an introductory rate of 9.9, then went up to 16.99 after that intro rate was done. I don't keep a high balance, so I didn't really notice.
Then I put a big purchase on it. I figured what the hell, right?
Yeah, til I got like 35 bucks in interest added to my account. The new APR for that account is 23.74% The lady in India who answered my call -- this is a Chase account -- said I'd been sent a notice in the mail in late June-early July. I never got it as I was in the middle of moving.

Damn. there's a lot that bothers me about this story on both sides: someone who's carrying a balance on his credit cards absolutely needs to pay attention to the notices they get in the mail from the card issuer to avoid missing fine print about rate increases and other new fees and tricks the companies play. I'm also a little astonished that the writer would add a new, major purchase to a card that already had a balance on it with such a cavalier, "what the hell" attitude. That's simply ASKING for it from your credit card company. Whatever you bought, did you really need it that bad that you were willing to make installment payments on it at a high interest rate? So many people talk about going on debt diets when what we really need is debt rehab. Get off the card!
On the other hand, if what the writer is saying is true (and for the record, I haven't called HSBC or Chase for their take), the card issuers don't deserve any slack here, either. Since credit card reform was passed earlier this year, credit card issuers have been using any excuse (and sometimes none at all) to jack up customers' rates, add new fees and in some cases cancel cards altogether before the new law takes effect.
Which brings me back to the proposal in Washington of a moratorium on new rate hikes until credit card reform takes effect next year. The proposal, from Sen. Chris Dodd, isn't supposed to have much chance of passing.

How many of you think it's a good enough idea that you'd be willing to call your own Senator to make your voice heard?

image: freedigitalphotos.net

$0 Balance Challenge: Paying off $8,157 in credit card debt in 12 months

Hope everyone had a GREAT weekend. I'm starting off this week with a little update on the $0 Balance Challenge. I got an email a little while ago from a woman who's looking to get rid of $8,157.47 in credit card debt over the next 12 months:

In June 2008 my graduation present to myself was Suze Orman's Young, Fabulous & Broke. I was constantly being harassed by creditors. Suze said I should pick up the phone and talk to them, so I did. I set up a payment plan $80 per month on one card, $120 per month on the other. I haven't missed or been late on a payment.
The great part of the arrangement was that they cut my interest rates and there are no late fees. The bad thing is that the cards are closed. At the time I didn't realize that they would be closed or what that would mean for my credit score. I am now working to pay the cards off and since my score is too low to get a credit card, I am thinking of getting a secured card to help rebuild my credit.

Card #1 $3,175.49
Card # 2 $4,981.98

I will definitely have the 1st card paid off w/in the next year. If I have most of the 2nd one paid off by then I will be extremely happy. The goal I'd already set for myself was to have 0 credit card debt by my 25th birthday. Also, I ran up my cards on books, flights back home for the holidays, a car that kept breaking down, etc. Eventually, I stopped using the cards, but since I couldn't pay, the interest rates and late fees kicked my butt.

This is a great example with a lot of lessons in it for those taking the challenge. Among other things, the writer noted that she is working part time and has student loans to pay, as well. This is a pretty common situation for recent college grads, many of whom find themselves underemployed and stretched with debt once getting out of school.

First, it's a great thing that she got proactive and worked out a payment arrangement with her creditors. I'm hoping that in addition to that, she got everything in writing, in case there are any problems later. She might also want to write the three credit reporting agencies (Experian, Equifax and Trans Union) and ask that a note be inserted in her file explaining that she's worked out a payment plan with the creditors who she's been delinquent with. It won't help her numerical score immediately but it could help if for some reason another lender pulls her report anytime soon.

For someone working part-time and living on their own, it might be a bit of a stretch to pay off nearly $9,000 of debt in 12 months. According to Bankrate.com's credit card calculator, it would take monthly payments of $279.55 to pay off the first card in a year's time, assuming an APR of 10.25 percent and no other fees, and $438.57 to pay off the second card. Right now her payment arrangement calls for far less than that, so getting to zero won't happen unless there's extra money in the budget for more payments.

Still, that's OK. There's a workable plan in place and since the cards are closed, there won't be anything new added to the balance. If she's diligent, she'll be celebrating a zero balance before too long. Good luck.

image courtesy freedigitalphotos.net

I paid off the credit card! Now on to the next goal!

I'm a fan of big, audacious goals and try to live by this rule: if you shoot for the stars and miss, at least you get the moon. That philosophy was a big reason I was successful in paying off my credit card debt in less than one year. If I dedicated myself to paying off every last dime but didn't make it, at the very least I'd have much less debt than I started with.

And so it is that one day after I made the final payment and reached my $0 Balance Goal, I'm immediately planning my next big, audacious financial goal will be. My immediate thought was to beef up my emergency savings and investment accounts and that's certainly doable given the amount of free cash flow I now have (since I'm not making a credit card payment anymore). But why not think bigger than that, and eye something else that will push me to stretch for the stars again?

So I've decided that my next goal will be that over the next year, I'm aiming to save and invest at least $25 grand. That's right. At least that much. That means I'll have to push myself to do more than just stash a portion of my paycheck: I'll have to continue to limit spending, network and be creative enough to create new income streams and be diligent enough to live off only the money I make at my nine-to-five and stash any extras away. It'll also mean I'll have to figure out some new tax strategies so Uncle Sam doesn't come and take it all. Wish me luck.

In the meantime, I'm going to continue to write about eliminating credit card debt and keep up my $0 Balance Challenge push. If you've already eliminated all your credit card debt, great. Start thinking about the next goal (and post it here in the comments section so you can encourage others.) If not, think of eliminating that debt as your first big, audacious goal and get to work.

Good luck!

$0 Balance testimonial: How she paid off a $2,900 credit card bill

I've heard from many people this week congratulating me on reaching my $0 balance goal or telling me their own success stories in paying off credit card debt.

But yesterday I got a comment from Lechelle, who like many who are contemplating taking my $0 Balance Challenge, is concerned about making it happen in just one year:

I do see myself becoming debt-free, but I need a few things first to take place to see my dream come true...more revenue or additional revenue. Things are just tight, but I know I need to start somewhere. Therefore, I have been brings my lunch more and more every week.

I think your concerns are realistic Lechelle, but I need you to not give up or give in because of the tight times. There will always be reasons why not, but your imperative is to be motivated by and think of the reasons why. Also, if you're a spiritual person, remember that like everything else in life, there will be negative forces that seem to crop up more and more the closer you get to your goal (I'll talk about how that affected me more in a later post). DON'T LET THEM STEAL YOUR VICTORY!

So this post is for Lechelle and anyone else with doubts about whether you can do it. Here's the story of someone who committed herself to pay off a card and succeeded. If she did, you can!

- Adriennewrites, 30, Chicago, who blogs at http://www.adriennewrites.net

I owed Discover card about $2,900...a lot of money for me, since I'm not really a credit user. Then, they raised my 5 percent interest rate to 9 percent two years ago and then to 11 percent last year and now to 14.99 percent. I was livid because I've got an awesome credit score, so I decided to pay it off and never use it again. I gave myself a year to pay it off. I got pissed seeing that I was paying $40 in interest a month and that the interest was compounding.

I set my auto-pay with my online bank to just pay $300 a month and I started bringing my lunch to work so I could afford it. I did this because I was tired of paying money to this credit card company who was doing me wrong and refusing to lower my rate again to 5% even though it had pretty much hovered between 5-9 percent for the last 7 years or so.
When I got an extra $50, I added it to the pot. Now I only owe $50. That'll be paid off , um, today!

My tips on making it down this far? Set up autopayments with the bank. Think about how cutting back on just one hairstyle or one pedicure can remove debt forever. I thought about how I wanted to go to Paris, and needed my money for Paris, not to be paying off some clothes from The Gap that I bought 5 years ago. How lame is that?

I also cut back on my savings so I could pay this off. I figured that once I get it paid off, I get to put the full amount into savings. So now that same $300 a month is being switched into both savings and paying off the next credit card bill. It will take me another year to get rid of this Visa bill, but I'll do it. I'm worth it.

This is what debt freedom looks like

That grainy BlackBerry pic is the account summary from my last credit card statement. In case you can't read it, is says that I started with a balance of $679.45, I made $853.83 in purchases (had a business trip that was reimbursed), then paid that off, plus some to the tune of $1,015.28.

The end result is that I'm $500 from freedom, and that $500 will be gone tomorrow. So why'd I post that, besides the fact that I'm ridiculously excited to see the balance drop to zero? Because images are among the most powerful motivating tools you can have when working toward a goal. So for those of you accepting my $0 Balance Challenge, I want you to think about the most powerful images you can think of that would motivate you toward paying off that card and using credit more responsibly in the future.

For me, motivation was as simple as seeing the balance slowly come down from nearly $8,000 to almost zero over the course of a year. Anytime I was having a bad day, I'd log in to my account online and see where the balance was, reminding myself that I was inching closer to my goal. That's a good tool I'd recommend for most people: take the account summary from each month's statement, and tape them in order to a piece of posterboard, and hang the poster somewhere you can see it. You'll soon be looking at a visual history of the debt going away and know you're making progress.

For others, it could be looking at a picture of your family and knowing you're giving them greater financial security, of finding a picture of your dream house, car or TV and knowing the less credit card debt you have, the closer you are to obtaining those things.

Whatever your visual motivation is, find it today, put it somewhere prominent and look at it often. Stay motivated!