by Alan Cleaver

The best way for anyone to handle their debt, at least up front, is to never spend more than one can afford to pay on. People need to set limits on how much they’re going to allow their credit card balances to get up to in total. People need to set limits on how much “fun” spending they’re going to allow themselves to do when they have bills to pay. And people need to learn how to save some of their money for those times when they need an extra boost of some kind.

How good are you at managing your debt?

Photo Credit: www.low-interest-rate-credit-cards.net

In these tough financial times, I’ve been a big proponent of people cutting up credit cards with high outstanding debts and paying them down.  In general, that goes counter to what many financial analysts have been telling people to do, saying it will bring down credit scores.

My point has been that credit scores mean nothing if a person continues wracking up more and more debt, as that also hurts one’s credit score, and that it’s better to gain control over spending while working towards getting out of debt.  A high credit score only tells people that you look like a good risk at getting more credit.  However, if you’re already overly maxed out, you’re already past the point of no return, and it’s more important to gain control.

That’s why it was good seeing a statement coming from Greg McBride, the senior financial analyst at BankRate.com.  He stated just what I’ve been saying for months now:  “Consumers have a tendency to focus on the nuances of credit scoring and often lose sight of the bigger picture.  They are so worried about something hurting their credit score, particularly in an environment like this one where lenders are tightening up and making it harder to qualify, that they are willing to live with bad terms that they never would have agreed to in the first place.”

These days, credit card lenders have started penalizing their good paying customers to recover from those customers of theirs who have had problems keeping up with their debt.  Recently, Capital One began jacking up some of their customers rates more than 7% in an attempt to get back to solvency.  American Express went a different way, by capping limit amounts on cards and making people pay more to pay off their monthly balances.  Both alienate their customers, but the worst part is financial “experts” going on TV telling people that they should just accept the limits, pay off the cards, and protect their credit scores.

If you’re someone who pays off your monthly balances as soon as you accumulate them, having your interest rate jump that high that quickly may not impact you much at all.  However, if you’re someone who carries a balance, it might not be in your best interest to keep that card, especially at a much higher rate.

A calculation might help you understand what you might be up against.  Say you have a balance of $2,000, an annual percentage rate of 13.9%, and your monthly payment at the present time is $35.  If you always paid $35, even though the amount of your minimum payment will go down with your balance, you’d end up taking 7 2/3rds years to pay off your balance.  If you take those same numbers, only increase the APR to 20.9%, it would take you 25 3/4ths years to pay off the same balance.

Is it worth any credit score to allow banks or other lenders to take that kind of advantage of you?  It’s something to seriously think about.

See more:
Credit Card Debt Consolidation
Should I Cancel My Credit Cards?
How to Get Out of Debt Part I