Completing Mission
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Any good plan of attack has mission goals to accomplish. In the War on Credit Card Debt, there are several mission goals. On this page, I will enumerate these goals, and I will provide a few tools and techniques to help measure progress.
The Ultimate Goal of this mission is complete and utter victory over credit card debt. Each of the following Mission Goals is a step toward that end. You must not waiver in your resolve, and you must take no prisoners. How long has the burden of credit card debt weighed on you, crushing your spirit? Free yourself from this tyrant!
You may think that this is the same as the Ultimate Goal of complete and utter victory over credit card debt. It is not, but it is a major benchmark, indeed. Keep reading; you will see that final victory requires the completion of some additional objectives.
Find some tools to assist you in completing this Mission Goal by visiting Declare War, and Magic Bullets.
The best habit is to use credit cards very rarely. When you use a credit card, be sure you pay off the entire balance within one month. Yes, one month. In essence, that means that you already have the cash when you make the purchase. So what is the point? Keeping credit card accounts somewhat active, but with low balances that are always completely paid off in the shortest amount of time builds your credit rating, thereby making it easier to get credit for something truly valuable, like a home.
The second Mission Goal may be seen as a sub-goal of this one. In addition to keeping your credit card balances low and paying them off every month, you must also strive to achieve higher total credit limits on your active cards. I have given you a script for speaking to credit card representatives in regards to limit increases on the Magic Bullets page. This simply amplifies the effect of keeping balances low. You see, the key is the ratio of outstanding debt to total purchasing power. If your ratio stands at 75% or higher, that is condition Red - very bad for your FICO score. A ratio between 25% and 75% is condition Yellow - it is okay, but it could be substantially improved. Get it down below 25%, and you have condition Green, especially if you are paying off those balances quickly.
For example:
Total Credit Limit Outstanding Balance Condition $15,000 $11,250 or more Red=Very bad ($11,250=75% of $15,000) $15,000 $3750 to $11,249 Yellow=Okay, could be better ($3750=25%of$15,000) $15,000 $0 to $3749 Green=Excellent! ($0=0% of $15,000)
The most important factor in building a healthy credit rating is making payments on time. If you are a day or two late, your credit card company will charge you a late fee. This keeps you in debt longer. You cannot allow this to happen, as it is literally spending money on nothing; it is exactly the opposite of what you are trying to achieve. Guess what? It gets worse than that. If you are late by 30 days or more, not only will you incur more fees, which are pointless, your credit card company will report you to one or more of the three major credit bureaus, thereby sending your FICO score into a tailspin. The technical term for this is "Double Whammy."
Herein lay the secrets to financial security and peace of mind. This Mission Goal is multifaceted; it also contains sub-goals. It begins by getting rid of unnecessary credit cards. Pick one or, at most, two credit cards to keep. Choose the cards that provide the most favorable credit position, by virtue of low Annual Percentage Rate and high credit limit. Try to strike a balance between the two criteria, but remember that APR is far more important than the credit limit. Cut, or, more satisfyingly, shred any remaining credit cards. Never close a credit card account until the balance is completely paid. Many people, desperate to strike some blow to a despotic credit card company, close their accounts while there is an existing balance. Of course, they must still make their monthly payments, but they lose the advantage of negotiation. A credit card company has no motivation whatsoever to lower the APR for a dead account. The technical term for this is "Short End of the Stick."
Continue to negotiate better terms for the cards you keep. Remember to use them, sparingly, and promptly pay them off. Eventually, you will see that your purchasing power and your credit score have exploded into uncharted and enviable territory.
Create and follow a budget. As simple as this step is, this is at the heart of most people's financial failure. Everyone knows and is fully aware that spending more money than you have coming in leads inevitably to ruin. Yet, many of us continue to do just that. The problem is that most people do not realize how much they actually spend. They can tell you the due dates and payment amounts of their bills, but they rarely account for how many times they went out for ice cream, or how much gas they could save by walking to the post office. Those little things really add up. Try writing down every single thing you spend money on for a week. Many of you will be quite surprised. After you do that exercise, create your budget, shaving off much of that discretionary spending. Maintain a small portion of your budget for entertainment, but do not go over it. Remember, that piece of the budget must be the first to go, should you find yourself in a pinch.
Fill out a financial statement every quarter. This is a form found at your bank or on any number of financial websites, which shows your income on one side, your expenditures on the other, and culminates with the approximate calculation of your net worth. This is a great tool, because you get to watch as your net worth creeps skyward, slowly at first, but ever faster. Provided, that is, that you stick to your battle plan to defeat your debt.
Continue to pay whatever you can afford. While you are paying off your credit card debt, you must put every extra dollar you can muster into the effort. (For a couple of great plans for attacking credit card debt, see Declare War.) When you pay off one card, apply everything you were paying on it to another card. When you pay off all of your credit cards, you still want to be paying out that same amount, or even more, if possible. This time, however, you will be paying yourself. This is not an article on investing, so I cannot give any advice except that your investment portfolio should be diversified. Consult an investment advisor when you are ready.
When your net worth is in the black, and it is steadily rising because of your serious discipline and commitment to succeed, you may then declare the war won, with you as the victor. Enjoy the spoils!