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Video: How to protect yourself from credit card companies

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    >> no, not at all.

    >> he came here just for you guys.

    >> oh, thank natalie, over to you.

    >>> protecting yourself from credit card thieves. with reports of companies hitting consumers with fees and rate increases before the new rules go into effect, experts say you need to remain vigilant right now. jean chatzky is the author of "pay it down." good morning, jean. this new card act of 2009 , goes into effect february 2010 , supposed to prevent unfair rate hikes and hidden fees. what's happening now?

    >> we've got several months before this goes into effect so the industry is basically saying, how can we make up the difference now by imposing new fees and rate hikes.

    >> talk about some of the specific practices that we're seeing happening right now. particularly with regard to interest rate increases. big concern for people carrying balances right now.

    >> what we're seeing is that the credit card companies are actually looking at their portfolios and saying, we can take this interest rate up, this interest rate up. it's happening to good customers. right now they have the the ability to take interest rates up on pre-existing balances. when the law changes they will no longer be able to do that. they'll only be able do it on new purchases.

    >> how do they determine the base interest rate .

    >> there is a lot of factors that go into that soup. but the big one is you and your credit score and credit behavior. if you have a good credit score , in most cases you'll pay a lower interest rate which is why you have to pay your bills on time and not use all the credit have you available to you.

    >> not all credit card companies are doing this.

    >> not all credit card companies. but if you get hit with one of these interest rate hikes, you have an option. you can basically opt out, say "i am not going to use this card anymore." generally then you have five years to pay off the balance at the old interest rate . but if you use the card, it's a tacit acceptance of the changing of the rules.

    >> does it help to call your credit card try?

    >> you can absolutely try but we are not seeing as much luck going that route as we did in the past.

    >> what about annual fee hikes and balance transfer fees? we're also seeing --

    >> a lot of companies are imposing annual fees which have not been around for quite some time. balance transfers which used to be imposed at about 3% of the balance that you were transferring are now at 5% in many cases. you want to watch where it comes to those balance transfers for a total limit. if the fee is capped at $75 to $100, you'll be okay no matter what percentage they're charging you. with that annual fee, again, you can give a call to your credit card company and see if they're willing to waive it. if you're a very, very good customer who charges a lot, they may be.

    >> but with the card act of 2009 will the annual fee hikes go away?

    >> they will not, no. you taking your life into your own hands and essentially just calling the company and saying, hey, if you want my business you're going to have to play the game my way.

    >> we help that works.

    >> exactly.

    >> a lot of people having a problem with this as we hear in our "money 911" segments on wednesday, they're increasing minimum payments that people have on their card balances.

    >> minimum payments used to be 2%, 2.5%. now they're increasing them to 5% in some cases. if you've lost a job, you may find that very, very difficult to swallow. again, this is one of those cases where you can call your card company and ask. but my advice in this case is just -- can i say this on tv -- suck it up.

    >> just pay that minimum.

    >> it's better for you to pay the minimum. if you look at a customer with $10,000 in debt, if they paid a 2% minimum, it would cost them $40,000 to pay off that debt and you'd be in debt for decades. if you can get your minimum up to 5%, you're going to cut that by so much, it will cost you only $4,000 to get out of debt entirely.

    >> jean chatzky, so much more to talk about but not enough time. we'll cover it in "money 911," for sure. read an excerpt from "pay it down" at todayshow.com.

updated 10/12/2009 10:32:46 AM ET 2009-10-12T14:32:46

Here's a scary statistic: the average American family has more than $8,000 in credit card debt divvied up on 16 different cards. That doesn't include debt from the mortgage, student loans, medical bills or anything else. Jean Chatzky gives tips over that'll help get rid of your financial burdens. Here’s an excerpt from her book, “Pay It Down,” that gives examples of two families struggling with debt:

From Step 3: Know and manage your credit score
Tales of Life and Debt:
Recovering from a Lousy Credit Score, Dollar by Dollar
Back in the fall of 2001, Lydia and Brian, a two-career couple in Washington, D.C., decided they wanted to build a house. They found a builder they wanted to work with, a subdivision in suburban Maryland in which they wanted to live and — excited at the prospects — went about prequalifying for a mortgage. All of a sudden, their bubble burst.

Mortgage rates at the time were near historic lows. Lydia and Brian were counting on using those rates to help them buy a house big enough to grow into. But their potential lender told them they would be able to qualify only for rates two to three percentage points higher. Why? Lousy credit scores — between 580 and 620, to be more precise.

“We knew we had six to nine months before the home was ready — we were building from the ground up,” explains Lydia. “So we decided to take the time to work on improving our credit scores and our overall financial situation.”

The first thing they needed to know was what, precisely, was dragging their scores down. They pulled both their credit scores and their credit reports. Without too much detection work, they found the culprits. “One reason our credit scores were so low was that there was a lot of outdated information on our credit reports,” Lydia explains. Accounts had been closed. Late payments that had occurred more than seven years earlier should have already dropped off the report.

Lydia and Brian took matters into their own hands, sending certified letters to all three credit reports disputing the information and noting, specifically, which items should be updated and which should be removed. “It took us some time to clean up those credit reports,” Lydia recalls. “I also called or wrote to the various creditors to make sure they updated their records.”

The other reason for the couple’s low scores was hidden in their bulging wallets: 12 credit cards, each used to 50 percent of its limit — or more. That made the couple’s debt-to-income ratio — an important component of their credit scores — higher than it should be.

No amount of letter writing, even certified letter writing, could take care of that. Instead, Lydia and Brian had to hunker down. They decided to forgo eating out as much as possible. They cut back the money they were spending on clothing and travel. They began to dump every available penny into a money-market account, which they then used to pay off their credit cards. Over the next nine months, they paid off 11 of 12 credit cards — and, to eliminate temptation, closed 7 of them. They then stopped using credit cards completely and saved an additional $10,000 to put down on their home.

When they went back to their lender several weeks before they closed on the house, he was astonished to see the difference in their credit scores. They had jumped to between 650 and 730 points. The result: Lydia and Brian qualified for a three-year adjustable rate mortgage at 4.95 percent. With their old scores the rate could have gone as high as 7 percent; their nine month exercise in frugality saved them $400 a month on their mortgage payment — nearly $5,000 a year.

To this day, Lydia and Brian pull their credit scores every six months to make sure they’ve remained high, an exercise that has continued to pay off. In August 2003, they refinanced their mortgage at a fixed 5.75 percent for 30 years. At that time, their home was appraised at $100,000 higher than its original appraisal. “I am an example of a person who learned how to repay her debts,” says Lydia, proud of her achievements. It wasn’t easy, but she did it — step by step, dollar by dollar. Without professional help.

From Step 4: Track your spending
Tales of Life and Debt:
“We Didn’t Know How Much We Spent!”
“I wasn’t very well educated in the world of money,” says Al, a project manager for a telecommunications company in Atlanta. “And that made it one of the most difficult topics for me to talk about. I never asked my parents how much they made. They never sat me down to go over what a budget is. One day after I graduated from college and started making money and spending money, my father sat me down and asked where my money was going. I said, ‘Hey, Dad. Did you earn this money? No. Then don’t ask me.’ ”

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Al probably would have been better off if he’d had that conversation with his father no matter how uncomfortable it made him. As it was, it took him a good decade to figure out precisely where his money was going — and that sabotaged his ability to save as much as possible for everything from college to retirement.

Al and his wife, Jean, have been married for 20 years. At the beginning of their life together, he went to work, and she handled the at-home budgeting — a very traditional division of labor. But over the years, Al realized that although he knew how much he was bringing home in each paycheck (and roughly how much Jean was taking in from her part-time job), he had very little idea where they were spending all that.

That was just the beginning of their downward spiral. Although neither Al nor his wife were raised with credit cards, both developed an affinity for charging. They convinced themselves they were spending money on things they needed. Al would walk into a department store and blow $1,400 on four suits he needed for work. Together, they wouldn’t think twice about charging a $150 dinner on a weekend, then spending another $30 at the movies.

They lived this sort of free-spending life for years. Then one day they realized that the balances on their combined cards had hit $20,000. They had no money in the bank and no retirement savings to speak of. Jean panicked. “She was worrying continuously for about six months,” Al said. He took a step back and decided panicking wasn’t going to do them any good.

“I said, ‘This is crazy. We just have to stop charging. We need to put the cards away and be disciplined.’” The next week he picked up a copy of Quicken, the popular personal finance software. Quicken — though it does many other more sophisticated tasks as well —  is, at its core, an electronic check register. You input how much you spend on which specific items; it deducts the expenditures from your overall balance.

Whenever you’d like to know how much you’re spending category by category, you can simply push a button and see your spending habits in pie-chart form. Al was amazed. “When you’re just looking at the individual numbers, the individual expenses, you really have no idea what you’re spending your money on. I was amazed at how much we spent on groceries, how much we spent on our cars. When you’re just looking at your balance, you’re not thinking ahead about where you want your money to go.” But that’s what Quicken forced him to do. It forced him to start choosing where his money might do him the most good.

And over the past few years, making those choices has enabled Al and Jean to dig their way out of debt. They stopped eating out as frequently, stopped spending money on cars and clothes. It took two and a half years for them to clear the $20,000 in credit card debt. But they didn’t stop there. They started overpaying on their car loan, tacking on another $150 to the $350 they owed each month. The result: They shaved a year and a half off the term of the loan. They’re overpaying on their mortgage as well, aiming to have the house paid in full in the next five years. The credit cards in their lives have been replaced by debit cards — although they have continued to hold off on big expenses. (Al would like a new car to replace his second one, a nine-year-old Honda, but he says, “I  just don’t want to cut the check for a new car. I want to write a check to the mutual fund for that amount.”)

And they’re saving. “We still don’t have a full three months’ emergency savings,” Al acknowledges. “But we have something.” Al sums it up: “By the time I’m 50, I want to know that my house is paid off. I want to know I have money in the bank. I don’t want the stress of owing money to other people. I want my balance sheet to be absolutely clean.”

Excerpted from the upcoming book "Pay It Down" by Jean Sherman Chatzky. Copyright © 2004 by Jean Sherman Chatzky. Published by Penguin Books, Inc. All rights reserved. No part of this excerpt can be used without permission of the publisher.

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