Last August, The Motley Fool, one of the most entertaining personal finance and investing websites out there, published an article called the 8 Commandments of Credit that I feel every consumer should read. Some of the commandments are common sense, some of them may not apply, but an educated consumer has a duty to read and understand what these rules mean and ensure that they follow them. They address some of the tactic that credit card companies use to try to extract as much money as they can from unsuspecting consumers like you and I. In this series I will elaborate on some of these commandments and give my personal take.

Commandment III. Don’t pay by their rules.

Don’t ever just make the minimum payment, in fact, try to pay off the entire balance or as much as you can every single time you get a bill. The minimum payment, a paltry 2-5%, means you’ll pay an arm and a leg for that cup of coffee last week and you’ll be paying it in bits and pieces for the better part of forever. Would you go into a bank and try to get a loan at 18% for a cup of coffee? No. Would you ask your friend to borrow five bucks (yeah, coffee’s expensive these days) that you’d return tomorrow for a cup of coffee? Sure. And you wouldn’t pay your friend back a quarter at a time, would you?

Source: The Motley Fool

Last August, The Motley Fool, one of the most entertaining personal finance and investing websites out there, published an article called the 8 Commandments of Credit that I feel every consumer should read. Some of the commandments are common sense, some of them may not apply, but an educated consumer has a duty to read and understand what these rules mean and ensure that they follow them. They address some of the tactic that credit card companies use to try to extract as much money as they can from unsuspecting consumers like you and I. In this series I will elaborate on some of these commandments and give my personal take.

Commandment II. Ignore bankers’ rules on what is an “acceptable” level of debt.
Did you know that it’s “acceptable” for someone to carry 25% of their income in debt? That means if you make $30,000 a year after taxes, bankers believe it’s reasonable for you to be carrying $6,000 in debt! Six thousand dollars! They don’t give any consideration to what kind of debt that is, whether it’s a 6% mortgage or a 20% credit card balance. Do you consider that debt the same? A low interest tax-deductible mortgage or a high interest credit card balance, which is worse? Or better?

My take on this is that you should keep your level of debt as low as possible and certainly as little of the 20% credit card variety as you can. The more debt you incur, the more your life belongs to the credit cards and not yourself. If you buy a car and have a car payment, you’re working towards paying off something you use every day and something that is probably a requirement for you to function (cars, unfortunately, are like that). You work in part because you want to but also because you have to, you have that payment you need to make.

Now imagine you charged to a credit card a whole bunch of things that you no longer own or that you temporarily used or consumed, now you’re working for the past, working for the credit card companies, and not working for yourself. You’re not working because you need to pay off a mortgage or a car note, you’re working because you’re enslaved by the credit cards. Don’t let yourself fall into that trap and you’ll be much better off for it.

Source: The Motley Fool

If you have a Capital One credit card, then you’d probably be surprised to learn that your credit score was being penalized for it. That’s because Capital One didn’t report your total credit limit to the three credit bureaus, they only reported your credit balances. What this meant was that your percent utilization (30% of your score) was higher than what it really was and your total credit limit was lower than what it really was, resulting in a lower credit score. Before you say, heck, that doesn’t really matter does it? You should know that this one change can boost your score anywhere from forty to eight points, a significant point difference.

Increasing your credit score from 659 to 700 can cut your mortgage rate from 7.68% all the way down to 6.59% on a thirty year $300,000 mortgage. That difference will save you $221 a month and over $2600 in the first year.

So if you have a Capital One card, rejoice! If you don’t, you probably don’t care then.