How to Manage Credit Wisely

Managing credit wisely is a key factor in achieving financial security. Below are seven recommended practices:

¨      Shop Around for Credit- Compare at least three different lenders for loan and credit card terms (e.g., APR (interest) and penalty APR, late fees, grace periods, rewards programs).

¨      Negotiate a Discount- Ask lenders for a lower interest rate (e.g., 12% credit card APR instead of 18%) or transfer balances to cards with lower interest rates and fees if the savings exceeds the balance transfer fee.

¨      Pay Credit Card Bills Promptly- Do this to avoid interest and late fees and to reduce the average daily balance on which interest is charged.

¨      Pay More than the Minimum Payment- Double the minimum payment, at the very least, and, ideally, pay credit card bills in full. Doing this can save hundreds (even thousands!) of dollars of interest on outstanding balances and years of payments.

¨      Match Credit Cards to Debt Repayment Style- Select low-interest credit cards for a revolving balance with partial payments and no-annual fee cards with grace periods for balances that are paid in full.

¨      Know Your Ratio- Keep consumer debt-to-income ratios at or below 10% to 15% of take-home pay. For example, if a service member owes $300 a month for a car loan and $150 for credit card bills and take-home pay is $3,000, the debt-to-income ratio is 15% ($450 divided by $3,000) and further debt should be avoided.

¨      Check Credit Reports Annually- Request reports from the “Big Three” credit bureaus (Experian, Equifax, and TransUnion) and look for errors and evidence of identity theft. Credit reports are free once a year to consumers upon request. Check the Web site www.annualcreditreport.com for details.

For additional tips, Rutgers Cooperative Extension has a downloadable Wise Credit Management Quiz.