Declare Your Independence from Credit-Card Debt

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If you're carrying credit-card debt, you know it's a financial anchor that's holding you back from truly enjoying your life. With interest rates averaging about 13 percent to 16 percent, there is no reasonable way to get ahead -- or even stay afloat -- financially unless you get those cards paid off.

So in honor of the Fourth of July, take this opportunity to declare your independence from your credit-card debt. Here are four straightforward steps to set you on your path toward that independence:

1. Track and reduce your spending. Write down where every penny of your money is going. Once a week, review the list and ask yourself whether you truly needed to buy what you were buying or whether it was something you could have either lived without or gotten a cheaper substitute for. Make it a priority to cut back where you can to free up the cash to pay down your debts.

2. Figure out how you may be able to earn some extra income. Overtime and moonlighting are time-tested ways to earn some extra cash on a regular basis to cover your costs. If those aren't feasible, consider holding a garage sale or selling stuff you no longer need via eBay (EBAY) or Craigslist. You may at least be able to get a one-time infusion of cash to make a serious dent in your debt.

3. Negotiate your interest rates with your credit card companies. If you have a good payment history, they'll want to keep you as a customer and may be willing to lower your rates with a simple phone call. If your payment history isn't particularly good and you're paying penalty rates as a result, they may still be willing to work with you. After all, they'd rather get their cash back at a lower interest rate than lose everything should you declare bankruptcy.

4. Build and execute a debt snowball. List your credit-card debts from highest interest rate to lowest interest rate. Pay the minimums on each one of them except the highest-rate card. For the highest-rate card, put every penny you can against that balance until it's paid off. Once it is, do the same on the new highest-rate card, and repeat until you've paid off every card.

Some folks find that they're more motivated by the quick wins they get by working their snowball plans from the card with the smallest balance to the card with the highest balance. If that's what it takes to get you motivated, it sure beats not paying off those cards. Just understand that you'll likely wind up paying more in interest by tackling the cards by balance order rather than by putting the same dollars each month toward your plan and working in interest rate order.

Light a Firecracker and Get a Plan in Motion

Those four straightforward steps are what it really takes to earn your independence from your credit-card debts. It's not an instant process, but once you're through it, you'll appreciate both the freedom from your debts and the extra cash in your pocket from the money you no longer need to put toward those payments.

Why Your Bank Thinks Someone Stole Your Credit Card
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Declare Your Independence from Credit-Card Debt

One reason why Marquis' gas purchases might have triggered a fraud lockdown? Filling their tank is a common first move for credit card thieves.

"Some of the things they look at are small-dollar transactions at gas stations, followed by an attempt to make a larger purchase," explains Adam Levin of Identity Theft 911.

The idea is that thieves want to confirm that the card actually works before going on a buying spree, so they'll make a small purchase that wouldn't catch the attention of the cardholder. Popular methods include buying gas or making a small donation to charity, so banks have started scrutinizing those transactions.

Of course, it's not a simple matter of buying gas or giving to charity -- if those tasks triggered alerts constantly, no one would do either with a credit card. But Levin points to another possible explanation: Purchases made in a high-crime area are going to be held to a higher standard by the bank.

"It's almost a form of redlining," he says. "If there are certain [neighborhoods] where they've experienced an enormous amount of fraud, then anytime they see a transaction in the neighborhood, it sends an alert."

(Indeed, Erin tells me that one of the gas purchases that triggered an alert took place in a rough part of Detroit, which she visited specifically for the cheap gas.)

People who steal credit cards and credit card numbers usually aren't doing it so they can outfit their home with electronics and appliances. They don't want the actual products they're fraudulently buying; they're just in it to make money. So banks are always on the lookout for purchases of items that can easily be re-sold.

"Anytime a product can be turned around quickly for cash value, those are going to be the items that you would probably assume that, if you were a thief, you would want to get to first," says Karisse Hendrick of the Merchant Risk Council, which helps online merchants cut down on fraud. Levin says electronics are common choices for fraudsters, as are precious metals and jewelry.

Many thieves don't want to go through the rigmarole of buying laptops and jewelry, then selling them online or at pawnshops. They'd much prefer to just turn your stolen card directly into cold, hard cash.

There are a few ways that they can do that, and all of them will raise red flags at your bank or credit union. Using a credit card to buy a pricey gift card or load a bunch of money on a prepaid debit card is a fast way to attract the suspicions of your credit card issuer. Levin adds that some identity thieves also use stolen or cloned credit cards to buy chips at a casino, which they can then cash out (or, if they're feeling lucky, gamble away).

When assessing whether a purchase might be fraudulent, banks aren't just looking at what you bought and where you bought it. They're also asking if it's something you usually buy.

"The issuers know the buying patterns of a cardholder," says Hendrick. "They know the typical dollar amount of transaction and the type of purchase they put on a credit card."

Your bank sees a fairly high percentage of your purchases, so it knows if one is out of character for you. A thrifty individual who suddenly drops $500 on designer clothes should expect to get a call -- or have to make one when the bank flags the transaction. If you rarely travel and your card is suddenly used to purchase a flight to Europe, that's going to raise some red flags.

Speaking of Europe, the other big factor in banks' risk equations is whether you're making a purchase in a new area. I bought a computer just days after moving from Boston to New York, and had to confirm to the bank that I was indeed trying to make the purchase. Levin likewise says that making purchases in two different cities over a short period of time raises suspicions.

"I go from New York to California a lot, and invariably someone will call me [from the bank], " he says. Since one person can't go shopping in New York and California at the same time, any time a bank sees multiple purchases in multiple locations in a short period, it's going to be suspicious.


Chuck Saletta is a Motley Fool contributing writer. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay.
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