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Don't follow my advice.Mar 12 '01 Write an essay on this topic.The Bottom Line Once out of debt, don't cut up the card. Build up credit rating with it. But always live within your means. I seem to have a completely different approach to credit cards than most people who have written reviews on here. I agree that if you are in debt to your credit card that it is very hard to get out. But once you do manage to get out of debt, I actually started using my card MORE than I had before. The trick this time was (1) don't spend more than you can pay off, and (2) pay it off every month. When I look at things I want or need to buy, I look at three things when deciding how to pay for it. (1) Is it a good idea to pay cash for this and own it outright now? (2) Is it better to finance it and keep the cash for other purposes? (3) Is this a want or a need, and if it's a want, can I talk myself out of it (I've become quite good at it, to my own frustration)? It may sound obvious that (1) is always the better option, but that is not always the case. For example, I bought a new bedroom set when I moved into my first new house (a completely different financing jungle there!). I could have either paid cash for it, charged it on my card, or financed it through the furniture store. If I had paid cash, I would have been strapped for cash in my checking account, and I didn't want that. If I had charged it, I would have had to carry a balance for a few months, incurring interest charges each month. With the rates of credit cards, I didn't like that option. The furniture store offered "12 months, same as cash" as a promotion. I could afford to make interest-free cash payments for 12 months, it was just the one lump sum I couldn't do. I actually got ahead of myself and had it paid off in 6 months. End result: I paid no interest, yet paid cash in installments. And even for day-to-day expenses, I use the credit card almost exclusively, except where it isn't practical (fast food for example). I try to make sure that there is enough cash in the checking account to cover the charge, so I can pay off the card every month. But this has two benefits. First, if I ever get mugged, the thief will only get a small amount of cash, and I can cancel the cards immediately so the liability there is minimized. Second, my credit rating has gone through the roof. When I bought a new car recently, financing was a breeze since my rating was over 770. I was told that anything over 700 is a no-brainer. The only way I could have built that up was to use the credit card over time, and in my own interest pay it off every time. An added "benefit" I have enjoyed is that every few months my credit limit gets raised. Right now I could buy a cheap Lexus on my credit card, not that I ever would. The interest rate on my card is very high, but I don't care since I pay it off every month. By the way, this is the same card I had when I started digging myself out of credit card debt hell about 10 years ago. Another factor I use in determining financing options is to look at interest rates. Cash has 0% interest (obviously), and my credit card has the highest rate (a great disincentive!). Other options might have better rates. A second mortgage may or may not be a good idea. A home equity based credit card may carry lower interest, but may give you too much temptation to spend more. In-store financing is probably not good since the interest rates are over 20% (the furniture example above is 23.98% after 12 months, accumulating from day 1), unless they have a "same as cash" deal that you can pay off BEFORE the end of the interest-free period. Of course, all of this depends on being able to control spending habits. If that is not possible, then bankruptcy is the end result. If you are already deeply in debt to credit cards, all I can say is, good luck getting out. But once you do get out, you don't have to cut up your credit cards, and you may be able to build a better credit rating by using it wisely, not just for emergencies. It's also one of the best feelings when you finally make that last payment on the credit card and can now say your balance is $0.00. One other bit of advice is, if you have multiple sources of debt, pay off the highest interest rate first, and pay minimums on the rest, regardless of current balance. In the long run, you will pay out less. Since credit cards tend to have the highest interest rate, that is usually where to start. Once the highest interest rate source is paid off, shift the money to the next highest, and so on. My profession isn't in finance, but Microsoft Excel is my friend, and that's what I figured out on my own using it.  |
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