Credit card companies aren't inherently evil - but they aren't looking out for your best interests either.
Debt stemming from unpaid credit is one of the primary catalysts of bankruptcy filings.
While Orange County Chapter 7 Bankruptcy Lawyer Vincent Howard knows that filing will allow you to establish a clean slate, it won't protect you from having to file again if you don't take to heart some of the lessons learned.
That's because even after your bankruptcy is discharged, you'll soon be targeted again by credit card companies, often charging you higher interest - and penalties for non-payment. They key is not to swear them off - they can be good for helping to rebuild your credit - but rather to take on this new debt wisely.
The following are pitfalls you will want to avoid.
1. Not paying your bills on time. This seems like an obvious one, but especially if you have already filed for bankruptcy once, the importance of this can't be overstated. Not only are you going to get hit with late fees and ever-increasing interest rates, but it will be a punch to your credit score - one you scarce afford.
For example, if after a bankruptcy you land a card with a percentage rate of about 13.25 percent, making one late payment could cause that rate to soar to nearly 30 percent. That doesn't include the $35 late fee. If you miss two or more payments in a row, you can be charged a late fee that equals 3 percent of your total balance. If you have a $2,000 balance, that's another $60. If payments aren't reconciled within a month, it can be reported to credit agencies. In fact, just one payment that's 30 days overdue can't dropkick your score by more than 100 points. One way to avert this problem altogether would be to pay the bills online or have them automatically deducted from your checking account.
2. Using up all the available credit you have. This is really about protecting your credit score as much as it is about shielding yourself from another round of snowballing debt. Credit agencies will look at how much debt you have, versus how much money you earn. After a Chapter 7 bankruptcy, you are starting fresh, with no debt, though a bankruptcy will impact your overall score. This means you want to keep your debt-to-income ratio relatively low - but above zero. In some cases, it's wise to apply for another credit card that will increase your available credit, but then spread the debt out evenly between the two cards, rather than maxing out one or both.
3. Only making the minimum payments. This is a classic sign that you are in over your head again with debt. Sure, it may not affect your score or hurt you in the short term. And there's nothing wrong with this every once in a great while. The problem is if this is all you can ever pay, it can take decades to emerge from this debt. Let's say you have $5,000 in debt and you have a fixed interest rate of 15 percent. If you only pay the minimum $100 a month, you're going to be paying that $100 for the next 22 years. What's more, you'll be paying more than $6,100 in interest - far more than the $5,000 you originally borrowed. Establish a plan early on after your bankruptcy to determine how much you can safely borrow.
Orange County Bankruptcy Attorney Vincent Howard at Howard Law can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.
11 common credit card mistakes, By Amanda Lily, Kiplinger's Personal Finance Magazine