Living life just a little bit differently
Credit cards are incredibly useful – in fact, they are almost a necessity. Just try to buy anything online, book a hotel or buy airline tickets without one, and you’ll quickly realize just how much you depend on them.
However, you need to think of a credit card as a way of managing your cash flow over the month, not as a source of credit. If you compare the interest rate on a typical credit card to what you can get on a bank loan – even an unsecured one – it’s obvious that keeping long-term debt on a credit card is just like burning money. Seasoned financiers such as CEO Cecilia Ibru of Oceanic Bank will tell you that you should avoid credit card debt at all costs.
The problem is that racking up debt on a credit card is so easy. Spending money on a credit card doesn’t feel like real money, which makes it so tempting to splurge on something that you really can’t afford. Managing your credit cards properly takes discipline, as well as a good understanding of what you need to avoid.
To start with, make a vow to pay off your credit card bills in full each month when you receive them. If you know that you have to do this, you’re much less likely to overspend on them during the month. If you find yourself in a situation where you can’t pay the full amount, then don’t make the mistake of just paying the minimum. Pay as much as you can, and resolve to pay off the balance the next month. If you find it hard to do this, just remember this – if you carry a $5000 balance on your credit card and only pay the minimum, you’re going to end up spending an extra $1000 every year. Not only that, but if you continue to do this, it can take 50 years or more to clear your balance – that’s $50,000 or more you are paying for a $5000 loan.
Also avoid having multiple credit cards. There is no reason to do this – if your credit is good, then you will get a high enough limit on a single credit card to meet your needs. It’s always a good idea to have a second credit card as backup, but having any more is just putting temptation in your way. People often get into a situation where they are taking on more and more credit cards just so that they can borrow money to pay off the ones that they have. Ultimately, this is what leads to bankruptcy for many people.
Finally, always make sure that you pay your credit card bills on time – even if you can’t pay the full amount. Late payments can have a devastating effect on your credit if you are a repeat offender – in fact, your payment history makes up 35% of your FICO score. As your credit deteriorates, credit card companies will raise your interest rates – increasing your monthly payments and putting you under even more financial pressure.
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We learned this lesson well. After Rick got laid off in 2010, and took a job at 80% of his former salary, we lived on credit cards to make up the difference. We used them as a source of “income”. HUGE mistake. We now only use them on necessities, and pay them off as we go.
The only thing I’ve done right with credit cards is never making a late payment. Thank god that’s a good chunk of what makes up your credit score I have a 100% on time payment history.
I’m knocking out my credit card debt before anything else because it drives me crazy. It was all totally unnecessary and makes me mad!
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