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Week of 2.9.07

Expert Advice on Controlling Debt

Amanda Gengler How can you maintain control over your finances, stay out of bankruptcy and make credit cards work for you? Money Magazine's Amanda Gengler has eight tips to maintain your financial health.

1. Find the right card for you

Open your mailbox these days and it is likely stuffed with credit card applications. Which offer is best? Credit cards are not one size fits all. The piece of plastic that best suits you will depend on how you use credit cards. If you carry a balance each month, forget rewards cards, which typically charge higher interest rates than comparable cards that do not offer cash back or air miles. In this case, a low interest rate ranks as the most important criteria. If you pay your balance in full, however, a higher interest rate is a non-issue for you so you can go for a rewards card. If running from your job to the gym to your son's soccer game causes you to sometimes forget to pay your bill, opt for a card that will not jack up your interest rate to as high as 30 percent when you pay late, and charge a low late fee, which average about $25.

2. Monitor rates and fees

Did your interest rate skyrocket to 30 percent because you exceeded your credit limit, paid late, or missed your payment? Did you get slapped with a $30 late fee? Each month monitor your statements for interest rate changes and penalty fees. If you find one, pick up the phone and ask your issuer to remove the fees or lower the rate. More than 75 percent of customers who ask for a rate reduction succeed, according to a 2006 study by Synergistics Research Corporation. Even if your rate has not jumped, you still have a shot at landing a lower one.

3. Pay more than the minimum

If you make only the minimum payment on a $5,000 balance with the average 14 percent interest rate, it will take you more than 11 years to pay off the debt, and you will fork over $2,000 in interest. If you up your payments by only $100 each month, your balance will hit zero in only 19 months, and you will save $1,400 in interest.

4. Keep tab

Many consumers have no idea how much they owe on all their debts, including mortgage, car, credit card and student loan. Make sure you track your total, as well as what percentage of your income goes to repay your debt. You may be surprised, or shocked, which can be enough to keep you away from loans for a while. If you discover that a large chunk of your income goes toward debt, or you have problems making your minimum payments, you likely have crossed the line from a manageable to dangerous debt load.

5. Stick to a plan

In their book "All Your Worth," Elizabeth Warren and Amelia Warren Tyagi write that consumers can be money worry-free if they aim for no more than 50 percent of their take home pay to go toward "must-haves," such as mortgage, insurance premiums, utilities, and food (eating out every night doesn't count). Another 30 percent should cover "wants", such as entertainment, vacations, clothes, and dinners out. That leaves the final 20 percent for savings and paying down credit card and other debt.

6. Understand the new bankruptcy laws

They make it more difficult for higher income consumers to erase their debt by declaring Chapter 7 bankruptcy. The laws force many consumers to instead go into Chapter 13 bankruptcy, which reorganizes your debt repayments but does not get rid of them. Laws vary from state to state. For example, some states may allow you to hold onto your home equity, while others force you to sell your home. The new laws also require that all consumers participate in credit counseling before filing for bankruptcy. Go to usdoj.gov/ust to find the government's approved list of counselors. Be sure to check for complaints against these companies at bbb.org, the Better Business Bureau's website.

7. Negotiate

Before you file for bankruptcy, some recommend that you first call your creditor to negotiate a settlement. Let them know if they can't cut you a deal, you will be forced to declare bankruptcy. Some creditors would rather get 60 percent of your balance than nothing, which may happen if you go bankrupt.

8. Take responsibility

Some industry critics blame issuers, who they say prey on consumers who can't afford additional debt repayments, for the mounting credit card debt many American families are facing. Others say consumers themselves are guilty. Issuers make most of their money from people who do not pay their full bill. About 70 percent of credit card issuers' revenues come from interest charges, and the percentage of revenue from penalty fees has been increasing, according to a recent study by the United States Government Accountability Office. So prevent yourself from becoming one of the industry's most profitable customers. No one else will stop you.