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Avoiding Credit Card Debt - Preventive Medicine is Best
Avoiding Credit Card Debt - Preventive Medicine
is Best
We all know the key to good health begins with a dose of prevention: eat
right, exercise regularly, and get a good night's sleep. Your financial
health is no different. By taking a few steps of prevention today,
tomorrow your finances will have a clean bill of health freeing you to
live a life of opportunity rather than of difficulty.
Keep the Right Perspective
Much of the problem with credit card debt problems comes from changes
in credit card availability, advertising, and values over the past
75 years. According to Linda Tucker, Director of Education for
Consumer Credit Counseling Service in North Little Rock, Arkansas,
it wasn't until the 1960s that credit cards started becoming available
to the average consumer. Now today, nearly everyone has access to a
credit card.
Advertising plays a role too. Howard Dvorkin, author of Credit Hell: How
to Dig out of Debt and founder of
Consolidated Credit Counseling Services, an organization that
provides education on debt and a debt management program, says that
according to one survey consumers are exposed to 300-400 advertisements
every day. Combine this with a shift from saving for the future and we
have a society trying to keep up with the Jones satisfying the desire
of the moment. Add the purchasing power that comes with a credit
card and you have the perfect formula for disaster.
But it doesn't have to be this way. If there's one thing Dvorkin wants
consumers to know, it's that you don't have to be a slave to the
credit card company or even to the seduction of advertising. You can
have control over your financial health without depending on a credit
card!
Manage your finances
Starting with a strategy will help keep you on track before you ever
even pull out the credit card. According to Tucker the first step is
determining your monthly income and needed expenses. As part of
these monthly expenses, figure in 5-10% of your income to set aside for
emergencies, long range savings such as a retirement account, and short
term savings. If you have some savings then you avoid having to put
large amounts of debt on a credit card in times of a crisis.
Setting up a budget is not always easy, so if you want some help
Consolidated Credit Counseling Services offers
free
budget counseling. You can also consult your phone book to see if
your community has a local office of Consumer Credit Counseling Service.
Setting up a budget is just the first step; sticking to it is the next,
and often more difficult task. To help keep you on track set goals
and put motivators in place. Tucker suggests setting a savings goal
with a deadline. Savings goals can include emergencies, vacations, cars,
and of course don't forget long range goals such as retirement. Tucker
also says a reward program can be a great motivator as well. Just keep
in mind that whatever you choose as a reward, it shouldn't compromise
the hard work you've done in managing your finances.
Finally, you need to monitor how much you charge on your card in
relation to your credit limit. You should never charge more than
30-50% of your available limit otherwise your credit score could go
down. For more information on credit scores read our article
On the Path to a High Credit Score.
Shop for the Right Card
Dvorkin says it's important to really shop around and get a credit card
personalized for your particular situation. Ideally he suggests getting
one with no or very low fees and low interest. It will take a little
time to compare various offers, but with the high saturation of the
market you'll find the perfect fit for your wallet. Browse the Card
Reports section of CardRatings.com to
shop
for every kind of credit card including reward, low-rate, business,
and cards for those with poor or no credit.
| TOP 10 CREDIT CARD MISTAKES |
|
| 1. |
Not knowing the interest rate |
|
| 2. |
Spending maximum credit limit |
|
| 3. |
Depending on the credit card |
|
| 4. |
Not allowing for mail and processing time |
|
| 5. |
Buying things not needed |
|
| 6. |
Reacting to advertising |
|
| 7. |
Paying only the minimum |
|
| 8. |
Not reading the fine print |
|
| 9. |
Choosing the wrong card |
|
| 10. |
Paying late |
|
Read the Fine Print
An afternoon reading the fine print probably doesn't sound very
appealing, but that one hour spent reading can save you hours of
headaches and hundreds of dollars in the long run. You'll understand
everything from your interest rate and fees to how to earn rewards and
how long of a grace period you have.
Know Your Interest Rate
If you're going to use a credit card, regardless if you pay the
balance in full each month, you need to know the interest rate. This
means not only knowing what interest rate you were offered, but also the
interest rate the issuer actually gives you on approval. In addition,
check the rate on your monthly statements because credit card issuers
can raise your rates for little or no apparent reason and with little
warning.
Even those who don't carry a balance need to know their interest rate
because emergencies do happen. Unfortunately, cars break down,
jobs are lost, deaths happen, and marriages end. While it's always a
good idea to have an emergency fund, sometimes the job search takes
longer than expected or the second car breaks down too leaving you with
no other choice but to put some expenses on the card. If you're not
up to date on your interest rate, you might end up paying more in
interest than you have to.
Pay the Balance in Full
This is important in keeping control of your credit cards. Before using
a credit card for a purchase, ask yourself, "Do I have the funds to
pay for this?" In cases of emergencies where your emergency fund
won't cover the whole amount you need to charge, experts say at least
pay more than the required minimum payment.
Pay on Time
Michael Killian, credit and debt management guide for
About.com,
says never make a late payment to anyone including car and house
payments. Because of the universal default clause in credit cards'
terms and conditions, credit card companies can raise your interest rate
if you are late paying any creditor or even your utility company. Read
our
Universal Default article for more information.
In fact, Killian recommends being very early if at all possible to account
for mail time and processing by the credit card company. If you're
payment arrives before the actual due date you will end up saving money
on interest because any interest you pay is calculated based on the
average daily balance; so if your payment can bring down that average
you will pay less interest.
Some people have turned to online bill paying to avoid potential
problems with the mail. While Killian doesn't recommend this form of
payment because of the increased risk for fraud by hackers - especially
if the company is not reputable or doesn't offer encryption - it is
definitely a better option to a late payment.
Use it Like Cash, Not a Credit Card
In one sense, you need to use your credit card like cash by paying your
balance in full each month. But remember it's really not cash.
Imagine the feel of that sleek, plastic card in your hand. It's so sleek
that it slides right out of your wallet with little effort at the check
out counter. Each time you pull it out it looks and feels the same. You
cannot physically feel your charges climbing higher and higher.
Now imagine a wad of twenties. The first time you pull it out its
thickness fills your hand - you feel rich (well, at least you feel like
you can afford the purchase your making). :0) But with each purchase the
wad gets a little smaller until eventually it's gone, and now you know
you can't afford any more purchases. Dvorkin calls this the green
factor - with cash you can physically feel how much or how little you
have.
The point is that you need to be in control of your credit card and
spending habits. It's much easier to be swept away if you use a credit
card for all your purchases.
Limit the Plastic in Your Wallet
Every credit card comes with its own set of terms and conditions
including varying interest rates, penalties, fees, grace periods and due
dates. It is much easier to make payments on time, remember which card
has the lowest rate, and save you from making a mistake that will affect
your credit history if you only have to keep track of one or two
cards.
| Pay Over the Minimum - Save
Hundreds of Dollars and Years of Your Life |
|
| ($2,000, 13% interest, 4% minimum, no
additional charges) |
How long it will take |
How much interest you will pay |
|
| Paying the Minimum |
8.3 years |
$ 693.12 |
|
| Paying first month's minimum every month |
2.5 years |
$ 345.14 |
|
| Paying twice the first month's minimum every
month |
14 months |
$ 160.86 |
|
Avoid Extra Expenses
Sometimes it's the little extra expenses that sneak up on you before you
even know it.
Cash Advances
Typically cash advances come with a much higher interest rate, fees,
and no grace period. The moment you take a cash advance you start
paying interest on that balance, which means even if you pay the entire
balance in full each month you still pay interest.
In addition, credit card companies apply payments to the balances
with the lowest interest rate first. So your $200 cash advance will
continue earning 20% interest until your $2000 purchase balance is
completely paid off.
Extra Products
Credit card companies will try to get you to purchase additional
products such as fraud protection and insurance. The truth of the matter
is you usually don't need it. By law you are liable for a maximum
of $50 if the victim of fraud, and in most instances you are not liable
for any amount. If you are thinking about adding on insurance, first
read our article
Credit Card Protection Insurance - Should You Get It?
Early Education
The best method for prevention is teaching our youngest generation
all about money before they even qualify for a credit card.
Statistics show that students are entering college without ever having a
personal finance class or knowing how to balance a checkbook. Yet once
students arrive on campus credit card issuers are eager to sign them up.
College students are racking up the bills. Some even drop out of college
to find a job so they can pay their credit card bills. And those who do
graduate typically enter adulthood with thousands of dollars in credit
card debt and student loans.
In addition, advertisers market more to younger and younger children, so
it's imperative to teach them very early about the lure of money and how
to manage finances. The earlier children learn how to manage finances
the less likely they will be to fall into credit card and debt problems
as an adult.
Fortunately many wonderful resources exist for parents and educators.
If you have elementary aged children check out
The "It's a Habit!"
Company and introduce your children to Sammy the Rabbit who will
teach them all about the importance of saving and developing good money
habits. The
Jump$tart Coalition for Personal Financial Literacy is another
organization dedicated to providing resources for teaching children from
Kindergarten on up through college valuable lessons in personal finance.
By Amy L. Cooper-Arnold,
CardRatings.com
Staff Writer
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