Q: Hey CreditCardGuru, I have around $5,400 spread across 4 different credit cards and am working tirelessly to pay them down. How can I figure out which credit card I should pay off first?

A: That’s a great question. Some people have different theories as to which credit card to pay off first, but in my opinion, the “Golden Rule” for this is the following:

Pay the highest rate balances first.

But not everyone agrees with me. Dave Ramsey says this:

Pay off the smallest debt first to create the greatest momentum in your debt snowball.

Ramsey believes that paying off the smaller debts first will motivate you more to pay off the bigger debts. With all due respect to the great Mr. Ramsey, I think this piece of advice is utterly ridiculous.

If your goal is to pay down your credit card debt in the quickest amount of time possible, how can that be accomplished if high interest rates are causing it to keep growing? Don’t you remember, Mr. Ramsey, that is where the phrases “debt cycle” and “debt snowball” originate from – seemingly never-ending debt because the newly accrued interest charges mostly offset your payments?

Where it gets complicated…

Start with the highest rate credit card first and knock that out, next go after the second highest rate card, and so on. Seems simple enough, right?

Well unfortunately, there’s something else you need to consider when choosing which credit card to pay off first:

Credit Utilization Rate (CUR)

This term refers to the percentage of your credit limit being used on a given card. For example, if you have a credit card with a $10,000 limit and a $4,000 balance, that would be a 40% CUR. The reason I bring this up is because having a high CUR can negatively impact your FICO score, even if the high balance is only on one card and the others have $0 on them.

According to MyFICO (an official FICO website) using 10% or more of your credit limit might adversely affect your score. That being said, most personal finance pundits claim it’s okay to use up to 30% of your credit limit, because the impact on your score between 10% and 30% is trivial.

Now I know what you’re thinking “My credit limit isn’t big enough to stay below 30%!” Well that’s the reason I’m talking about it! Are you using 50%, 60%, 70% or even higher on an account? If so, you may want to give some extra priority to paying it down, even if its interest rate is not the highest.

Once your CUR on a card starts going past 50%, banks usually start viewing you as a higher risk (like you’re at the end of your rope with credit). Many forum posters have reported their credit limits being slashed to the amount of their balance, when they start hitting utilization in the 60’s and 70′s.

But sometimes even when you do have a high CUR on one or more cards, the credit card to pay off first still remains the one with the highest rate. If you aren’t planning on taking out any mortgages or loans within the next couple years, then maybe the credit score ding you get from the high CUR is worth it, if it means you will be saving money on interest by paying the highest rate card. Ultimately, you will have to weigh the pros and cons to decide for yourself.

Use 0% offers as long as they won’t encourage debt

As I stated above, the less interest you are charged then the quicker your debt will be paid off.

However for some people, 0% credit card deals encourage them to spend more. As long as you’re not one of them, then I would highly recommend shifting your highest rate balances to a 0% balance transfer offer.

After you do that, the rule for which credit card to pay first will remain the same: Pay the highest rate balances first. Since the 0% offers won’t be bearing interest, you can make minimum payments on them, while focusing on the next highest rate cards you have remaining.

Review the top 0% cards for transfers

Q: Can you be sued for credit card debt? What can I expect after I stop paying my bills?

A: Well, let me first start off by saying I am not a lawyer. Nothing that follows is legal advice.

What can you expect in the near term?

First bill is not paid
For the first bill that is not paid, a late fee will be applied which will probably be $35, depending on the balance and card issuer. Any payment that is between 1 and 30 days late is a “30 day late payment” so that is where you will be at after the due date passes. That being said, many banks don’t bother reporting 30 day late payments (so you can probably still pay and avoid a late payment being reported). The late fee and newly accrued interest will rollover to the next bill.

Second bill is not paid
Once the due date passes on the second bill, that’s a 60 day late payment. At this point, your APR will almost certainly go up to the default/penalty rate (which is usually around 30%). This rate increase after a 60 day late payment is permitted under the credit card reform laws, regardless of whether or not you’ve had your account open less than one year. That higher rate and another late fee will be reflected on the following statement.

Third bill is not paid
Now the credit card account is 90 days late. The debt will be growing even faster right now, because you have the late fees that have been added onto the balance and interest is probably now accruing at close to 30%.

Fourth bill is not paid
At 120 days late, it’s quite obvious you won’t be paying the bill and the account will likely be charged off. Even while the debt is in collections, the interest will continue piling up.

Can credit card companies sue you at this point? Yes, they can take whatever actions they wish under the Fair Debt Collection Practices Act and suing you is one of the options. But how often do credit card companies sue for not paying debt? Well, the likelihood depends on a number of factors including the amount owed and the creditor (some are more aggressive than others). However more often than not, instead of the credit card company suing you directly, they sell the debt off to a third-party collection agency.

What happens if you are sued for credit card debt?

Assuming the credit card company is still holding onto the debt, you can be sued anytime within the statue of limitations (which vary state by state). That means it may be possible for them to sue now or years from now, up to whenever the statue of limitations is.

If a lawsuit is filed and you get sued, then the judgment is typically for the full amount of the debt, plus interest and fees, as well as court costs and attorney fees. How that judgment can be enforced will depend on the state you live. In some states it might be possible for a creditor to request seizure of bank account balances or to place a lien on your house (but don’t worry, it’s highly unlikely that a credit card company can take your house). To the best of my knowledge, I believe all states allow wage garnishment by creditors except for Texas, Pennsylvania, North Carolina, and South Carolina (these are states where it still might be possible under certain conditions – i.e. if it’s the only way to fulfill a judgment).

Ultimately, this is something you need to consult an attorney for – to both find out how you should handle it and what a creditor can and cannot do to enforce a judgment in your state. I understand that if you’re in this circumstance, you’re probably saying “I can’t afford an attorney!” Well I have good news for you – cities and counties provide free legal aid sources where qualifying individuals can go get help without paying a dime. LawHelp.org provides free legal aid referral information for all 50 states.

Conclusion?

Can a credit card company sue you for debt? Yes. I wouldn’t say it’s extremely likely but it is possible and the amount of debt, the credit card company, and the state you live in will probably all be factors in whether or not it actually happens.

Ask your question on Credit Card Forum!

Q: How can I get a credit card balance transfer for life?

A: Last decade, many major credit card companies would run balance transfer offers that gave zero percent for the lifetime of the balance. These promotions weren’t extremely common but they could be found with a little research.

Then of course the financial crash happened near the end of the decade, followed by the long recession. During that time the 0% for life offers disappeared. Despite the recovery and the fact that we’re now in 2012, these lifetime 0% offers still haven’t came back.

Will they ever return?

A lot of times I get asked if the 0% lifetime credit cards will ever come back and I believe the answer is no. Here’s why…

For starters, they never really existed!
Before the Credit Card Act of 2009 went into effect, banks pretty much had the ability to raise rates on customers whenever they wanted to. So when you snagged a balance transfer for life deal, there was really no guarantee in place that it had to be honored.

Creditors would use excuses like late payments or changes to your credit report as justification for raising your rate. When that didn’t work, some would raise the minimum payment amount up to 5% of the balance per month for accounts that weren’t paying down fast enough.

Now that the credit card reform is in effect, it’s a heck of a lot harder for creditors to raise your interest rate. For that reason it’s unlikely we will see low interest fixed APR lifetime balance transfer offers again… because then the banks would actually have to follow through and honor them!

The reform leveled the playing field
Before the reform, cardholders with bad credit and high interest rates were basically subsidizing the credit card deals that people with great credit had access too, such as zero percent offers.

Those transfer for life cards were often big money losers for the banks (especially when used by rate surfers) but the 20% to 30% APR and late fees paid by other cardholders would make up for it.

But now that the playing field has been leveled, those with both good and bad credit have to be treated equally in many aspects. Therefore those offers just don’t make financial sense for the creditors to do anymore.

The economy is not what it used to be
The economic crisis at the end of last decade was obviously a big wakeup call for everyone, especially the banking industry.

The “good ol’ days” of job security for us appear to be over in today’s global economy. At the peak of the economic crisis, the credit card companies experienced this first hand when they saw a record number of defaults by accountholders.

This caused the creditors to [finally] come to the realization that they can’t just give out credit like candy on Halloween. It’s now quite evident even their most creditworthy customers might default in the future in the event of a job loss or foreclosure. This is another reason a lifetime balance transfer credit card is too risky to offer… even if the customer has top-notch credit and a good job right now, there’s no guarantee of that continuing forever.

How a lifetime balance transfer might still be possible

Even though a 0% for life card isn’t an option, there might still be a way you can avoid paying interest for the life of your balance. Here’s how…

Step One: Get the longest offer available

Find the longest B.T. offer you can (hint: check this ranking of the top rated balance transfer cards). Ideally if there are any offers with no balance transfer fees, that’s even better.

Step Two: Repeat The Process

If you can’t pay down the balance entirely before the 0% promotion is up, then you can transfer it again to a similar offer. If each offer is 12 to 24 months in length, there really shouldn’t be any reason why it would take you more than two offers to pay off the balance entirely.

Banking is all about fees, fees, and more fees nowadays. That means that the no fee transfer promotions are hard to come by (sometimes there are none offered by any card issuer). But once in a while one is available – if you happen to snag an offer that means you will be able to pay down your debt for free.

Conclusion: It still might be possible to get a 0% balance transfer for life of balance, that is, if you’re willing to be a rate surfer jumping from one card to another!

You may be surprised to see exactly how credit card interest works…

Credit card interest can be confusing, even for those who have been using credit cards for decades.  Sure, it’s buried in the fine print how credit card interest is calculated, but deciphering that legal mumbo jumbo is no easy task! So here’s a straightforward guide to help you.

How do credit cards calculate interest?
In the United States the vast majority of credit cards use the daily balance method – that means interest is calculated each day you carry a balance.

1. The daily rate is calculated
If your APR was 15% then your daily balance would be calculated as follows:

15% divided by 365 days = 0.0411%

So you would be charged 0.0411% each day a given amount is carried as a balance

2. Interest is compounded for each day
The APR advertised on credit cards is usually what is called the nominal rate (the rate before taking into account the compounding). Your effective interest rate will be higher because of daily compounding – each day your interest is calculated and added to your balance. That means the following day’s balance will be slightly higher (and therefore cost slightly more in interest).

But to what degree will daily compounding affect how credit card interest is calculated? Well, going back to the example above, the nominal 15% APR would actually turn into an effective interest rate of 16.18% if interest was compounded daily.

Of course payments, credits, and new charges will also be taken into account when calculating the applicable interest for each day.

3. The daily interest charges are added up
The credit card interest is calculated for an entire billing cycle by adding up all the daily interest charges during that period.

Using the above example, the nominal monthly APR would be 1.25% (15% divided by 12 months) and the effective APR would be 1.258% if compounded daily.

Now you know how credit card interest works! However, there is something very important you may not know…

There is no grace period if you don’t pay your charges in full!
Many people assume if you don’t pay your balance in full, interest will only start accruing after the grace period. Unfortunately that’s not how it works.

Basically, everyone is charged interest from the date of purchase on their credit cards. However if you pay off your bill in full before the grace period, those interest charges are waived and you don’t pay them (nor will you ever see them on your statement).

However if you do carry a balance forward, those interest charges going back to the date of purchase will show up on the following month’s bill. This is why many are shell shocked when they see their interest charges for what they thought was just one month.

Ask your question on Credit Card Forum!

Q: What are the consequences of credit card default? What does the law say and what will happen if there is a judgment?

A: Debt and credit card laws vary by state. Wherever you live the process is typically similar, but there are some important things unique to specific states, some of which we will discuss in a moment. Before the actual credit card debt default occurs, let’s first look at the process leading up to it.

1. Your account will be 30, 60, and 90 days late

After you don’t pay your first credit card bill it will be 30 days late, 60 days for the next billing cycle, and 90 days for the cycle after that.

Many wrongly conclude that “30 days late” means you are paying 30 days after the due date… that’s not correct. Days 1 through 30 after your due date are all classified as 30 days late (but most banks won’t report a late payment if it’s received during the first week or two after the due date).

As you can guess, the credit score consequences become exponentially worse with each tier. Having a 30 or 60 day payment will definitely wreck havoc on your credit, but once you get to 90 days the consequences are really going to hurt.

2. Your account will be late 120 days, 150 days, or charged off

Eventually your account will be charged-off; the bank will write it off as bad debt. Now when that happens may vary depending on the credit card company – not every bank will wait ’til after 120 or 150 days. Until the debt has been charged off, you should have the ability to still make things right and pay off the full amount and avoid the credit card default consequences. The late payments will still be on your credit record (unless you negotiated otherwise) but those will be a lot better than having a credit card debt default.

Regardless of your bank, in all 50 states the debt collection statue of limitations starts at 180 days, so it’s likely they will wait longer than 180 days to charge-off the account.

3. Your account will head to collections

After the account has been charged off it will head off to collections – usually sold to a third-party collection agency. Aside from the credit score damage, this is one of the most frustrating credit card default consequences for many. Why? Because it usually involves a barrage of harassing phone calls and letters in the mail.

The Federal Fair Debt Collections Act dictates what a collections agency can and cannot do to you. Unfortunately, you hear stories all the time about the rules not being followed. Here are some things the collections agency is supposed to abide be:

• You must be given 30 days to dispute the credit card default (they can’t just automatically assume it’s valid). If you are disputing it, that must be done in writing.
• If you have asked them not to, you can’t be called at inappropriate times (like 3 am) or at places you prefer not to be called (like at work).
• The debt collector is strictly limited in what they can say to family members, co-workers, etc. in the event they encounter them on the phone.
• If you ask them to stop communicating with you or to only communicate through your attorney, they must follow through with your wishes.

There are many other rules, too. For a full list please visit the Fair Debt Collections Practices Act

Warning: If you are married, credit card default in California and other community property states may affect both both spouses equally. That means both people in the marriage may be held accountable for the default, even if the credit card account is only in one person’s name. Community property states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, as well as Puerto Rico.

4. There might be the possibility of a lawsuit (and jail?)

This isn’t a common practice but it still is a possibility. If the collections process is unsuccessful a lawsuit may be filed.

So what are the default consequences if a lawsuit is filed by the creditor? Well assuming the debt is valid (it’s really your debt) then odds are a judgment will be issued against you. If you were properly served the court papers and choose not to show up, the judgment can still be issued against you.

Wage garnishment and seizure of bank funds?
If a judgment is granted against you, some states may allow the creditor to use wage garnishment or seize funds in your bank account to pay the debt. Such aggressive measures like that are not allowed in all states, so check with an attorney to see what is and isn’t allowed in the state you live. If such consequences are legal in your state, showing up for court would probably be a good idea so you can tell the judge your side of the story and why/how wage garnishment or bank account seizure will hurt you.

Can you go to jail for credit card debt?
Well “debtors’ prison” was abolished in the 19th century so it is not a crime. However during the Great Recession, we saw a rise of radical judges throwing people in jail for credit default (or at least trying to).

For example, Minnesota has some of the most creditor-friendly laws and according to their newspaper – The Star Tribune – there were 845 cases in 2009 where arrest warrants were issued for debtors. If a court-ordered judgment was issued against a debtor and they ignored it, some Minnesotans were arrested for contempt of court.

It’s important to remind you that being arrested is extremely uncommon and has only occurred in a few states. For those that are arrested, it sounds like the debtors were usually only jailed for less than 24-48 hours, with the aforementioned newspaper saying 8 hours was typical. Even if you do live in one of the few towns or counties that practice this, odds are probably very, very slim it will be an actual consequence for your defaulted account.

5. The effect of a credit card default on your credit

While wage garnishment, seizure of bank funds, and jail are things that only affect a very tiny sliver of those who default on credit card debt, there is one consequence you are 100% guaranteed to experience… the impact of the credit card debt default on your credit score.

The exact consequences a debt default will have on your credit depend on a few things:

• What was your credit like before defaulting? If you already had bad credit beforehand (perhaps you already had a bad debt) then the impact will be less noticeable. After all, “bad credit” and “really bad credit” are more or less looked upon in the same way by banks these days.
• One or multiple credit cards defaulted? Did you default on one of your credit cards or all of them? Having one credit card default will probably have less of an impact than having charge-offs on multiple credit cards.
• What was the amount of the default? Whether your default was $10 or $10,000 it is going to hurt your credit significantly. However, the higher the amount is in relation to your other accounts, the more of an impact it might have.

What should you do?

Most people would agree it’s best to avoid the credit card default consequences if at all possible. But at the same time, there are dire situations in life which really leave us few options.

Because credit card default laws vary state-by-state, make sure you talk to an attorney because this article is for general informational purposes only and is not advice (it’s neither legal advice or otherwise). Also, keep in mind that credit card settlement through debt negotiation companies may be just a painful. To understand why read this article about credit card debt settlement.

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