I just did a radio interview with Stephanie and one of the topics we touched upon was how she got into credit card debt and how she managed to get out it. Today I would like to highlight how credit cards can be taken advantage of and how you can actually get sucked into it.

The real key to making sure you never carry a balance in your credit card is actually to have a solid budget. Stephanie has talked a lot about it on her blog. In our radio show, she revealed that as part of her assignment in her personal finance class in college, she had to actually make a 1 year budget, and she has clearly spelled them out here. There are 2 things that I think are very important when you are making a budget for yourself. They are:

• budget for contingencies – things like a car breakdown, an unexpected out-of-pocket medical bills can wreck your budget
• budget for things you have a weakness for – I know that there are probably occasions when you should refrain from buying frivolous stuff. But each one of us has a hobby (some might call it weakness) like buying the latest sunglasses, collecting comics. There must be room in your budget for these stuff otherwise you might just go insane

Understanding the purpose of your credit card – Obviously, credit cards offer consumers convenience of not carrying large amounts of cash. Furthermore, if you ever lose your card, just one phone call will stop all future transactions. In there is a merchant dispute, your credit card company will normally handle it for you. But different types of cards serve different purposes.

Build a credit history – Credit cards are one of the simplest ways to build a credit history. And if you are in college, credit cards for college student is relatively easy and simple. However, if you want to build a credit history, then build a good one. That means always paying your bills on time and paying in full (PIF) every month. Over time, these good payment habits will result in a good credit score. Obviously, having a credit card is not the only way to build a credit history. If you have a mortgage, or a car payment, or a loan from the bank, your payments will be reported to the credit bureaus and you will build a credit history. Even your gym memberships can be reported to the bureaus. Late payments even in something as mundane as that can hurt you. Students or most recent grads are not likely to have a mortgage or a car loan so credit cards are the easiest way to start a credit history for yourself. The advantage of using a credit card to build a history is that if you pay in full, you are paying no interest. Contrast that to say an auto loan where you are actually charged an interest.

Coupon Stacking, Savings and Rebates – Stephanie recently graduated and made a budget for living on her own herself. There are certain bills that you have to pay regardless and it makes sense to save as much on these.

Groceries – One of the items that you always have to spend is on food. But it turns out that there are many ways to save on groceries and food. There most obvious way is to make use of coupons. You can get coupons from the newspapers, from online sites like this one. There are also tons of blogs like this and this that highlight the latest coupon deals. But aside from coupons, there are also manufacturer’s coupons. If you use your manufacturer’s coupon on top of your store coupons, the savings can be huge. You can even get some stuff for free. I recently went to the supermarket for a gallon of milk and because the value of the store coupon was more than the organic milk I bought, I actually got a rebate! (for buying milk).

But if you are really savvy, you can add another stack on top of the coupons by using credit cards with cash back rewards. These cards typically give 1% rebates for every dollar that you spend on the card. But the best cash back credit cards will give you anywhere from 2% to 5% on things like groceries, gasoline, utilities etc. When you add up these savings on top of the store coupons and manufacturer’s coupon, the savings really add up.

Gasoline – Depending on where you live, you may actually not have to drive. And living in the city and not having to drive can save you a lot of money (though that may be offset by higher rent!). You save on gasoline, insurance, parking, car payments and the occasional repairs. But if you do drive, you can save money by charging your gasoline to a gasoline credit card (ie one that pays rebates – more than 1% – on gas). That will also help you save lots of money. The other things that you can really save on is making sure you are using the right type of gasoline for your car. Most of you will know that there is regular, premium and super premium gas. If you can get a car that runs ok on regular gas, that will save you a lot of money in the long run. Many car manufacturers manual only “recommend” the type of gas that you can run on. Ask the dealer because though some car manuals recommend “premium” gas, they will do ok on “regular gas”.

Utilities – We all have to pay our utilities. If you read other blogs, you will find advice on how to save money on your electric bills (like running your washer at off peak hours, insulating your windows better etc). But if you are a recent grad, chances are that you will be renting. Since, the bills are the bills, you might as well try to save some money on it. The most obvious way to save is to charge it to your credit card. Most utilities will allow you to do that. What I do is to charge it to my cash back card and at least I get a 1% rebate on them. What I also do is to set up an auto pay so that my bills are automatically paid.

Using your company’s corporate card – If you are fortunate enough (in today’s tough economic environment) to work for a larger company, you may be given your company’s corporate card. This could come in very handy especially if you have to entertain clients a lot or even travel a lot. In my first job (which was sales related), I was given a corporate American Express Business Gold Card by my company. I flew at least 5 or 6 times a year and entertained clients a lot for dinner etc. I was fortunate in that the company paid for the bills on the corporate card (some companies require employees to pay!) and they allowed me to keep the reward points I earned on the card for myself. Hence, I racked up lots of reward points which I later redeemed for numerous airline tickets which me and my wife (fiancée back then) used for our vacation! (Very sweet.) Even if you company does not issue you one and you can get reimbursements, then you should definitely choose a card that can help you with either frequent flier miles or at least earn some cash rebates.

Credit card companies fighting back

If you follow the above advice (i.e. pay your bills on time, pay your bills in full, and maximize your reward earnings), credit card companies consider you a deadbeat. Which means you are the least profitable customer. You shouldn’t feel bad about it simply because they still make money off merchants when you use your card. But their most profitable customers are actually ones that pay late (and are charged a late fee), carry a balance (they make money from the interest payments) and sub-prime card holders (whom they charge lots of excess fees).

Scaled Back Cash Back Rewards – One of the ways that credit card companies have been scaling back is by reducing the rewards especially in the cash rebate area. For just a couple of years ago, credit cards like the Citi Dividend Card and Chase Freedom offered 5% rebates on gas, groceries and drugstore purchases. They slowly reduced them to 3%, then 2% and now these cards are no longer offered.

Questionable Practices for those who carry a balance – If you had one of those 5% cash rebate cards and you no longer have those perks, you lose out a little, but all is not lost. I have (and I guess Stephanie) always stressed that if you could avoid carrying a balance, that would be the best thing. And I think this has been validated by what credit card companies have been doing to those who carry a balance. The folks that have only made the bare minimum payments are feeling the brunt of this. Here are some examples of what is going on now.

• Credit card companies are increasing interest rates to high 20+% – this has the effect (in many cases) of doubling the interest payments for many folks. If you do not have a buffer in your budget, you could be in deep trouble.
• Cutting credit lines – here’s a typical story I get in my emails all the time. Person has $10,000 credit line but carries a $5,000 balance. They do not pay in full but instead pay the minimum or more than the minimum. Credit card company slashed credit line to just above $5,000. In some cases, they slash it to below the balance that the card holder is carrying and ding them with an over-the-limit fee.
• Increasing payments on balance transfer minimums – In her quest to reduce her debt, Stephanie got a credit card that offered 0% apr for 12 month on her balance transfers. Back then, she was paying the 2% minimum. Some credit card companies have recently raised their minimum payments from 2% to 5%. One again, if you have no room in your budget for emergencies like this and you are cutting it very close, then you will face a doubling of your credit card interests and bills. I get a lot of complaints from readers about Chase and Bank of America doing that. Now, doing a credit card balance transfer these days are less appealing than when Stephanie got hers because they now all come with balance transfer fees whereas back 2 years ago, there was no balance transfer fees.In fact, back a couple of years ago, the deadbeats abused the hell on these 0% deals by either
  1. refinancing their home equity line of credit (by say $100,000)
  2. Taking out a huge 0% balance transfer deal and putting the money in a savings account like an ING account and pocketing the difference in interest rates.
• Worst of all, cardholders just stopped using the card after the introductory period. Now, these were the real deadbeats. So the credit card issuers started charging a balance transfer fee, then removed the caps from the BT fees and finally reduced the introductory period from 12 months to 6 month. To the final nail to the coffin was to increase the minimum payment from 2% to 5%.

Budgeting, being a deadbeat and not being taken advantage of – I guess the point that I’m trying to get across is that you should always be a “deadbeat” to credit card issuers. If you are, then you are either earning cash rebates (saving money), earning reward points (also saving money), getting one months credit if you pay in full. But if you do not have room in your budget for emergencies, you carry a balance and you pay the bare minimum payments, then you are susceptible to credit card companies yanking your credit lines from under you, increasing your interest rates or doubling your minimum payment. They key to making sure you never carry a balance is to have a detailed personal budget.

Be a deadbeat to the credit card companies and there’s no way they can get you into trouble.

You have the right to check your credit report once each year, for free. And actually, there are three major credit reporting agencies, so you get three credit reports for free each year.

But here’s a great idea: Spread your credit reports out throughout the year, so that you get better coverage, and a better understanding of your total financial picture. Here’s how I do it: I get one of my credit reports in January, another in May, and the third in September. Then the next January, I repeat! I happen to do them in this order: TransUnion, Experian, Equifax, but any order would do.

It’s a good thing to monitor your credit at least once a year, but a lot can happen over the course of a year. Say I checked my credit reports all at once, and the next week, my identity is stolen by someone who uses my social security number to open a ton of accounts. I might not know about it until a full year later, when I checked my reports again. But if I pull one report every four months, I have a greater chance of catching an error (or a thief) in good time.

So, if you don’t pull your credit reports on a rotating schedule, consider starting. If you already do, this is your reminder to pull your next credit report now! (Assuming you pulled the last one in May, like I did.)

And remember, you should always get your free credit reports from http://www.annualcreditreport.com, which is the site set up by the Federal Trade Commission. Other sites claiming to give you your “free” credit report might have singing pirates, but they’ll also try to charge you a monthly fee.

Today’s article is a guest post graciously written for the site by Kelly Oakin. About the Author: Kelly Oakin is on a mission to help others get their credit back on track after a setback. She is a staff writer for FreeCreditTrio.com, a resource that provides your free credit score from the top 3 credit bureaus.

When I first moved out on my own, I figured that managing my finances would be pretty simple. After all, I didn’t have too many bills and my income seemed to cover everything — on paper. Though I didn’t give my parents the pleasure of telling them they were right until almost a decade later, they were right… It is tough to stay on budget with the income of an entry-level professional without getting into a financial mess with credit cards and loans and late fees.

We go from having an open budget with no expenses to having rent, utilities, car payments, and other expenses that come with normal daily living. Then, there are extremely high college and university expenses that just keep rising.

We inevitably make mistakes. In fact, the U.S. PIRG states that 25% of students had paid a late fee, 15% had paid fees for going over their limit, and 6% had their credit cards cancelled. These statistics aren’t shocking considering our age, but we have to learn something from our mistakes and actually fix them. If you’ve made a mistake, I have five strategies for cleaning up bad credit history that will make sure you aren’t punished for these innocent errors for seven years or more.

Strategy #1: Proactive Repair

It’s impossible not to notice your debt load mounting up. Therefore, as soon as you notice things get out of control, and you know you’re going to have issues, contact your financial institutions and see what they can do to help. Many of them will work with you to delay payments, lower interest rates, or wave fees to help you fix the issue.

They may also agree to remove the negative mark on your credit when you follow through on arrangements to pay the amount still owed. This is even more of a possibility now that financial institutions are in trouble and are seeing a high number of borrowers default. Finally, make a smart financial plan that allows you to save as much money as possible.

Strategy #2: Use Federal Law To Your Advantage

According to federal law, you can fight any marks on your credit that cannot be verified, are false or inaccurate, or out of date. Therefore, so long as you monitor your credit report and credit scores right from the start, you’ll be able to fight troubling entries immediately before they become a serious issue. If you have difficulty getting this straightened out, seek out legal financial aid.

Strategy #3: Battling Negative Credit Entries Involves Moving Past Them

In many instances, you can’t eliminate a bad spot on your credit. But, what you can do is build your credit and prove that you’ve learned your lesson, fixed previous problems, and are willing and able to take responsibility. To do this, get a small loan or credit card (which may require a deposit) and use it wisely.

With a credit card, for example, use it for your groceries or utilities and pay it off in full every month. This allows you to build credit easily without spending additional money. Having a major credit card in good standing also says a lot about your financial responsibility.

Strategy #4: Use Free Resources To Help You

Services such as the National Foundation for Credit Counseling are non-profit organizations that provide free credit counseling services to anyone who needs it. If you are having trouble working with a creditor on a false claim, or just need additional information to help you make the right choice, these nationwide organizations will put you in touch with someone who can provide you with the information you need.

Strategy #5: Use Good Credit To Your Advantage

If you have credit with companies who aren’t on your credit report such as department store cards or others, ask them to make a positive report for you. This helps to offset any negative marks that you can’t remove because it helps build your reliability and trustworthiness. Keep in mind, however, that these companies are not required to do so and will not make a false statement. The important thing is to ask and see. After all, the worst thing they can say is ‘no.’

In the end, the most important thing to remember when it comes to your credit is that it takes years to build it, and one mistake to ruin it. Educate yourself and don’t be afraid to seek help if you need it; you’ll benefit from your diligence for the rest of your life.

Before I can tell you this story, a few things need to be mentioned. First of all, this is not an indictment of my parents in any way, or a mockery of them for being “stupid.” They were mislead by a clever advertising campaign, just as many other people were before them. Secondly, it is impossible to talk about my parents in any coherent way without explaining my family situation: when I refer to my “parents,” I am talking about my mother and her partner of 14 years. Together they have raised me since I was nine years old. I call my mom’s partner my “stepmom,” because that is the word that comes nearest to describing our relationship.

Saturday was my Graduation Day! As a treat for successfully completing my Bachelors, my parents took me out to eat, along with my older sister and my boyfriend. As usually happens when my sister and I are together, the conversation eventually turned toward personal finance. My mother chimed in to let us know that she and my stepmom had just pulled my stepmom’s credit report… via FreeCreditReport.com.

Like many people, the web address “FreeCreditReport.com” had been drilled into my parents’ brains by a singing pirate/angry husband/subcompact car driver. Even I thought some of the commercials in the ad campaign were rather clever. But I’ve been getting my credit reports from AnnualCreditReport.com for over two years now, because I know that it’s only authorized source to get the three credit reports you’re guaranteed each year by the Federal Trade Commission. The problem is that my parents didn’t know that.

How FreeCreditReport.com Gets Money Out of People

The name is the extremely misleading part, but there’s one bit of their commercials that you should pay particular attention to: “Requires enrollment in Triple Advantage.” As you might suspect, Triple Advantage is the not-free part of FreeCreditReport.com. It’s a “credit monitoring service” which watches your credit reports from all three reporting agencies (Experian, Equifax, and TransUnion) and alerts you whenever there are changes. This service is actually run by one of those three agencies, Experian. When you sign up for FreeCreditReport.com, you get both your credit report and credit score from Experian, but you also sign up for Triple Advantage, which costs $14.95 per month.

If you cancel your account with FreeCreditReport.com within a week your credit card will not be charged. This is how they can get away with calling it “Free.” But it also brings up an important point: you should not have to enter in credit card information to get your free credit report! The legitimately free credit report service, AnnualCreditReport.com, has other ways of verifying your identity, and does not ask for a credit card number.

About the only advantages I can see for FreeCreditReport.com are:

1. You get your Experian score, which you don’t get for free from AnnualCreditReport.com. But, you can get your TransUnion score for free from ad-supported CreditKarma. And with CreditKarma, you can get it for free as often as you like, whereas your free Experian score from FreeCreditReport.com is a one-time deal.
2. If you actually want Triple Advantage, and you sign up knowing what you’re getting into, it’s not a bad deal. You could also get credit monitoring service from other companies, such as MyFICO, which I’ve used before and trust more than a company that engages in deceptive advertising.

Cancelling FreeCreditReport.com

If you’ve been tricked by the musical ad campaign as well, you’ll be happy to know that cancelling the service is fairly easy. And as I said before, if you cancel within a week of signing up, you shouldn’t be charged. Which is exactly what my stepmom did, the day after we talked. You have to call their Customer Care directly in order to cancel (1-888-829-6560). It’s actually extremely easy — I suspect they get a lot of cancellations! The first option in the “phone tree” was “Press 1 to cancel your service,” which connected us with a live operator, and the whole thing was over about a minute later.

Spreading the Word About AnnualCreditReport.com

One of the things my mom said during our conversation was that she’d never heard of AnnualCreditReport.com, or their ad campaign to counter FreeCreditReport.com and other sites claiming to be “free.” In other words, she’d never seen this commercial:

Which is a shame, but let’s face it, the FTC isn’t going to spend as much money on an ad campaign as Experian does. So it’s up to those of us who know about AnnualCreditReport.com to spread the video around. So think about your parents, your relatives, and your friends: if they wanted to check their credit reports for free, would they know to use AnnualCreditReport.com, or would they too be bamboozled by a sleezy singing pirate?

Spread the word! Send the FTC commercials about AnnualCreditReport.com around to your friends and family. And most importantly, if a commercial for FreeCreditReport.com comes on the television while you’re in the room, check with the people around you to see if they know the truth about the service.

Earlier this week I brought up the proposal in the Senate-passed CARD Act (Credit Card Accountability, Responsibility and Disclosure Act) which would require adults under the age of 21 to get a cosigner in order to get a credit card (or prove significant income, whatever that means — don’t we have to do that anyway?). I’m not the only one who had an opinion on this particular feature of the new legislation. Here is a taste of what other people are saying about the proposal:

Man Vs. Debt: 18 Year Olds Now Require Co-Signer To Obtain Credit Cards. Still Maintain Right To Catch Bullets With Their Face!

Either you are a legal adult at 18 or you are not.  If you are considered old enough to fight and die for this country, you should be considered old enough to not have to jump through a bunch of hoops to get a credit card.

If you don’t think 18 is mature enough to obtain a credit card or even to consumer alcohol then we should be raising the legal adult age to 21, not placing a bunch of government restrictions, exemptions, and regulations.  In addition, it appears card holders will need co-signer permission before increasing credit limit and making other changes.  Mommy, Daddy, please let me get a credit card…  please!

Independent Beginnings: Attention Students: You are Gonna Need Permission to Open that Credit Card

Traditionally, eighteen-year-old freshman college students have been immediately attacked by credit card offers as soon as they start school. Lacking education on how credit cards work, many of these students jump at the opportunity of opening one of these “magic” cards and end up falling further and further into debt. It will be interesting to see how this will change now that students under twenty-one have to get their parents to cosign with them (or another adult over twenty-one). Will this allow students more time to learn about how credit cards work before amassing huge amounts of debt on them? Or, will this have little effect whatsoever? I guess it would largely depend on the student’s parents’ views on credit card usage.

No Debt Plan: Credit Card Act Passes Senate

Then again it always makes me nervous when government gets involved with business affairs. Yes, the credit card industry has cost millions of Americans billions of dollars. The changes to the age limits makes me uncomfortable. I know that college students have been ignorant on credit card use, but what about the ones who are responsible? And why should the Bank of Mom and Dad have to foot the bill if the student is irresponsible? And what happened to building up a credit history as soon as possible?

(Note: No Debt Plan’s article also has a nice explanation of the difference in the House version of the bill, which doesn’t have the same “under 21” restriction as the Senate version.)

Bad Money Advice: Credit Cards and Our Nation of Children

American laws are ambiguous about when adulthood starts.  For many purposes, 18 is the magic number.  At that at age you can vote, get married, join the armed forces, and, with the looming exception of credit cards, enter into binding contracts including a car loan or a mortgage…

This inconsistency bothers me, but not as much as the worrying general trend of increasing the age at which we consider people to be grown-ups.  And that is just part of an even larger trend, the growing reluctance to treat anybody as a grown-up.

I highly encourage you to check out each of this articles, and pay special attention to the discussion going on in the comments for each. This is getting to be a hot topic, and I say “Good!” It’s about time we talked about young people and debt! I really hope that this under-21 restriction doesn’t make it into the final version of the bill, but I am somewhat glad that it was there to spur discussion.

I’m not a big fan of protecting people from themselves. You know that bumper sticker that says “Let’s just remove all the safety labels in the world and let stupidity take its course?” Well, I’m not quite that harsh, but I think that people only need protection from the things they can’t protect themselves from. I can’t protect myself from a doctor while I’m under anesthesia, but that’s why we have laws and medical malpractice suits. I can’t protect myself from poisoned food and drugs, but that’s why we have the Food and Drug Administration. But I can protect myself from overspending and living outside my means.

As I’ve said, I don’t have a problem with most of the measures in the CARD Act. There are some shady practices in there that are hard for people to protect themselves from, since the credit card companies make all the rules. So go ahead and regulate those things… but don’t tell me I’m suddenly an adult who can handle a credit card at 21 instead of 18.

Sure, I’m a lot better about money and credit cards now, at age 22, than I was at 18 or 19. But that’s because I had the opportunity to screw up. I was 19 when I got that first credit card, and within six months I had run up a balance, because I was living outside my means. In my case, living outside my means meant “trying to go to an expensive film school” instead of “buying Playstations, HD TVs, and drinking every weekend,” but it was still living outside my means. But I dug myself out of that hole and now I use my credit card to earn rewards – paying off the full balance every month. The difference in those three years was experience and education, not some magic maturity that happened when I hit the legal drinking age.