Credit cards are a convenient way of not having to carry wads of cash to make purchases and, in the short term, they can help consumers take advantage purchasing options when cash flow and amazing sales do not match up. Using credit in the right way can greatly enhance the quality of our lives.
Unfortunately many people are far too liberal with credit card use. Using credit cards to buy things one cannot afford or to artificially maintain a standard of living that does not match one’s income may be fun for a while but are disastrous in the long run.
Most consumers do not really understand the cost of using their credit cards. Being able to afford the payments does not mean that one can actually afford the purchase. Using credit cards and making minimum payments can double or even triple the cost of a purchase because those payments mostly cover interest charges. That means a twenty-dollar pizza paid for on a credit card might end up costing sixty bucks!
Consumers who unwisely use credit quickly discover they are on a credit card treadmill. It doesn’t take long before most of their cash becomes tied up in making payments on their cards. There isn’t cash left to live on and when they use up the cards they have, they apply for more, either requesting limit increases or applying for new cards. Reality only begins to set in when their credit applications are eventually denied.
If you are beginning to recognize the credit card treadmill in your life, it may not be too late. But do not wait. What may just be a tank of gas here or a bag of groceries there will quickly become an all out inability to afford even the basic necessities of life without credit.
If you take decisive action now, you will not only save your credit report, you will save thousands of dollars and in the long-run; you will save your quality of life. Here is what you need to do.
1. Stop using most of your cards. OK, your heart just sank. Take a minute and breathe. You may have to tighten your belt a little and sacrifice in order to do stop relying on credit but if you don’t do it now, it will be done to you eventually. Realize that for as long as you have been using your credit cards, you have been borrowing against your future income. It has always been predictable that you would have to sacrifice spending cash on stuff you might want later because you used credit to buy stuff you wanted earlier. Maybe you never thought of it this way but that is exactly what you did.
2. Carry only ONE card and pay it off each month. You can still have the convenience of using a credit card without the expensive interest. Simply do not use the card unless you have the cash in the bank to pay it off when the statement arrives. If you do not carry a balance from month to month, there should not be any interest to pay. If there is, get rid of that card!
3. Pay more than the minimum. Making the minimum payments means paying the most interest. When you are actively reducing your debt, you should over pay the minimum balance due by least 20%. If you do this and do not use the card, you will be applying the additional payment to the principal balance due and you will reduce your debt. Walletwizard.com offers a free, easy to use form that helps do this with more than one credit card.
4. Pay bills when they arrive, not when they are due. Most credit card interest is based on your Average Daily Balance. The sooner you make a payment, the lower the balance and the less you will pay over time. You also avoid the possibility penalties in the form of late fees and the interest rate increases that may result from your payment arriving after the due date.
5. Be careful transferring balances. If you have good credit, you are probably receiving offers to transfer your other balances to a new account. In general, applying for more credit is a bad idea because of the danger of using your old cards after transferring the balance. Sometimes those introductory rates are awfully tempting! Before you apply, carefully read and understand the terms of the new card. How long will that introductory interest rate last? What do you have to do to maintain that rate? What interest rate will kick in after the introductory rate expires?
6. Create and maintain a spending plan. Have a clear understanding of your income and expenses. You have to live within your means. In fact, for a time, you will have to live below your means in order to pay off your debt. Tighten your belt a little more and throw as much money at your debt as is sustainably possible.
7. If you need help, get it; but beware. If you watch television, you see countless commercials for debt solutions promising to reduce your interest rates, consolidate your payments, or even pay less than you owe. Before you opt for any of these advertised solutions you need to understand your options. Carefully consider the terms, the associated fees, and the consequences, particularly to your credit report. If it sounds too good to be true, there is likely something you do not understand about the program.
If you are having difficulties associated with credit card debt, doing nothing will only make things worse. Acting now to reduce and even eliminate your credit card debt is one of the best things you can do for a brighter financial future.
Joseph Onesta is a speaker, trainer and work culture consultant. As Director of Education for Consumer Credit Counseling Service of Los Angeles, he helped thousands of individuals and families toward financial wellness through articles, seminars and his personal finance certificate course. He now offers his services through employers who understand the value of Personal Finance Employee Education. Visit his website at www.integrityhpi.com.
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