Avoid credit card debt with preventive measures
June 25, 2009
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
Start with a strategy to 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 hop online 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 avoid using more than 10 percent of your available limit, otherwise your credit score could go down.
Shop for the right card
Dvorkin says it's important to shop around and get a credit card personalized for your particular situation. Ideally, he suggests getting one with no or very few fees and a low interest rate. 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.
Read the fine print
Taking some time out of your afternoon to read 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. While it's always a good idea to have an emergency fund, you might find yourself in a situation needing to use your card and roll over a balance. Traditionally, rewards credit cards carry a higher interest card than non-rewards cards. Even with those paid-in-full intentions, you might carefully consider signing up for a card with a higher rate.
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. Though "universal default" was prohibited in the CARD Act of 2009, credit card companies can still review other accounts and, if you're unable to pay, put your account into default.
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. This is a convenient option and often allows you to schedule when the payment should be made. Make sure the website is from a reputable bank or company, otherwise, risk of fraud could be increased.
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). 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.
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. That means even if you pay the entire balance in full each month, you'll still have to pay interest.
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 $50 if the victim of fraud, and in most instances you are not liable for any amount.
The best method for prevention is teaching our youngest generation all about money before they even qualify for a credit card. Research shows that students are entering college without ever having a personal finance class or knowing how to balance a checkbook. Yet once students arrive on campus, credit card issuers are eager to sign them up. College students are racking up the bills. Some even drop out of college to find a job so they can pay their credit card bills. And many who do graduate typically enter adulthood with thousands of dollars in credit card debt and student loans.
In addition, advertisers market more to younger and younger children, so it's imperative to teach them very early about the lure of money and how to manage finances. The earlier children learn how to manage finances the less likely they will be to fall into credit card and debt problems as an adult.
Fortunately, many wonderful resources exist for parents and educators. If you have elementary-aged children, check out The "It's a Habit!" Company and introduce your children to Sammy the Rabbit who will teach them all about the importance of saving and developing good money habits. The Jump$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.