Three simple hints for avoiding credit card debt
Mar 14 '01
The Bottom Line Banks are NOT your buddies; pay as you go; and be a smart consumer -- three thoughts on how to reduce or eliminate credit card debt.
Every day, the white window envelopes snuggle into my mailbox. Some are trimmed in gold, some in silver, some in green. They have return addresses in Georgia, New York, California, Illinois... all over the US. And darn near all of them say the same thing: Lucky Me! I've been pre-approved! Oh frabjous day! I swoon with the rush of self-esteem! Someone APPROVES of me!!! How I love my new friends!!!!
Hint number one: credit card companies are NOT your friends
Here's my first hint on avoiding credit card debt: do what I do with every one of those enticing little envelopes. I tear them in half (unopened) and drop one half in the wastebasket in the kitchen and the other half in the wastebasket in the bathroom. Why? It's simple: I'm not going to accept a credit card from anybody unless I'm the one who initiated the application!
All those banks and credit card companies that send you the pretty pre-approval notices have only one motive: profit. Profit, profit, profit. PROFIT! And how do they get the profit they so urgently desire? Let me tell you, it ain't from the 2-4% they charge merchants whenever you use their cards. It's from interest on the unpaid balance in your account and from the so-called "finance charges" and "late fees," which earned their names in an attempt to circumvent the usury laws in most US states. Of course, they're promising you a "low introductory rate" for the first few months, and telling you that it's gonna stay low after that introductory rate is finished. They're especially eager for you to transfer your debt from other credit cards to this one.
Yeah, sure: this is up-front loading: an attempt to get you to run up a big bill while the rates are low, so that when the rates inevitably rise you will already have a tidy balance on the card (and you're in the habit of charging everything).
Don't do it! If you think you need a credit card (and you may not), do the research: financial websites, money magazines, and your daily newspaper all publish lists of credit card companies that offer low rates and low or no fees. Make the call for an application yourself, and keep tossing the unsolicited material.
Hint number two: pay off the balance every month
I'll just bet you've heard this one before -- lots of times -- and the reason is that it is the key to avoiding high-interest debt from your credit cards. The biggest possible trap in the business is getting a customer to pay the minimum every month. That means that the lender has got himself a cash cow -- a steady source of income from interest and fees. They'll LOVE you for doing this!
Pay off your full balance every month. If you're far enough over your head that you can't, make the maximum payment you can so that the amount of principal decreases. If you're in over your head in more than one account, Pay off one as quickly as possible, then the other (preferably paying off the lowest-interest account last). Watch out for the offers of low monthly minimums -- they're a sucker's bet.
And also pay close attention to the method of computing finance charges. A grace period of 25 days between posting of a charge and its due date is standard. Shorter grace periods (20 days) can put you in a squeeze. Also watch for hinky wording in how the "balance" is computed. I trashed a Discover card when I realized that they charged interest on the last two months' balance even if I'd already paid off the old bill. I don't know that they do this any more, but I suspect they do.
If you're in major debt already, it might be well worth your while to take out a debt-consolidation loan. Such loans are typically lower-interest than credit card debt, and can be arranged with electronic funds transfer payments so that you will always make the payment. Before you sign on the dotted line, though, cut up every one of your credit cards (and telephone the companies to close the accounts). With luck, it'll keep you out of trouble until you're debt-free again.
Hint number three: use your existing credit wisely
The experts used to say that you should never charge anything that would be consumed before the bill comes in. That's still a good rule, especially if you live from paycheck to paycheck. That means that you shouldn't charge food and gasoline, you should pay cash for them. That also means you shouldn't charge concert tickets, ski passes, and other entertainment. If you can't pay in cash, you probably can't afford it.
There is no worse habit than thinking that you'll be able to pay for a credit card bill out of your next paycheck. Think about it: if you couldn't pay for all your normal expenses out of this paycheck, how can you expect to pay the normal expenses plus a credit card bill out of the next one? Is that a no-brainer or what?!?
The real meaning of credit
A credit card is almost a necessity in this day and age. You can't rent a car or reserve a hotel room without one. Online and catalog shopping are far more difficult without one. And establishing a credit history so that you can buy a house or car is made far easier if you have a credit card or two that you've used responsibly.
A credit card is also necessary for emergencies -- the trip back to Iowa when Grandpa has a heart attack; the emergency vet services when your dog swallows a sock; the cracked cylinder head in your Corolla. But if it's used for emergency expenses, remember hint two: pay it off immediately!
Americans are especially prone to running up credit card debt, a national habit that -- while it may be good for the GDP -- is actually pretty stupid. Many of us grumble about the amount of money we spend in taxes, yet spend outrageously large amounts of our income on servicing personal credit card debt. Pay attention to these hints and you'll put yourself into a much better financial position for the long run.
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