The Proper Use Of Credit Cards
by David Berky
Credits cards are a convenience, not a crutch.
Credit cards are a great way to make purchases
and record to the penny your spending. They also
provide a way to postpone payment on items and
thereby earn more interest on your money.
For example, if you have a money market account
that gives you 5% annual interest and you spend
$1000 a month through your credit card, you can
keep that $1000 in your money market account for
an additional month. At the end of a year you
would have earned an additional $51.16 for doing
Now $51 may not be much but it's free!
Also you can use your credit card statements to
keep track of exactly how much you are spending
and where your money goes. With some credit
cards you can use personal finance software to
download your credit card transactions from the
Internet right to your home computer.
Credit cards may actually save you money. Some
people avoid making purchases if they do not
have cash. Cash seems to "burn a hole" in our
pockets, it just disappears. It is so easy to
spend and it is right there. But a credit card
takes more effort and you know that you have to
pay the bill later that month.
Your credit card may also offer a rewards
program where you get cash back, frequent flyer
miles or discounts on services and merchandise.
Credit cards are convenient. Some purchases,
especially those on the Internet, will only
accept credit card payment. Also you don't have
to continually go to the bank or ATM to get
A credit card also provides a measure of safety.
You don't have to carry large amounts of cash
for large purchases. Even if your card or credit
card number is stolen, you are not responsible
for the thief's use of your card.
But credit cards can also be a crutch. Too many
people see their credit limit not as the maximum
amount of debt they can go into, but as an
account full of money that they can spend.
Average household consumer credit balances have
now topped $7000. The monthly interest charge
for a credit card charging 18% interest is over
$100. More than $1200 a year just in interest.
And this interest is not like home mortgage
interest that you can deduct from your taxes.
You are paying an additional 15-36% on top of
the $1200 for taxes on the interest you are
charged. That brings your interest charge total
up to $1400-1600 each year. Even more if your
balance or interest rate is higher.
What is silly is that many people who are paying
18% interest rates on credit are also investing
in a stock market that only averages 11%. Or
worse, keeping money in money market, savings
accounts or CDs that only pay .5-3%.
Want an investment that returns over 20%? Invest
in paying down your debts. In the above example
you can save over 20% with taxes factored in.
Many people have developed the habit of using
their credit cards to buy what they want now and
paying for it later. They then make only the
minimum payments required. Often the minimum
payment is set so that you only pay the monthly
finance charge (interest) or just a small amount
This will keep people paying that 18% rate for
years. A $1000 purchase can end up costing $1500
when paid off after 5 years. Ironically many of
these same people will wait months for a sale so
that the item's price goes down 10-20% and then
make a purchase on their credit card and end up
giving the savings to the credit card company
Sometimes the credit card can lead a person into
living a lifestyle that is beyond their means.
If a person gets in the habit of dining out two
to three times a week and these meals are paid
for by credit card, the card balance increases
quickly. Often the additional expense was not
planned or budgeted. People can even end up
spending more each month than the actually earn.
This can continue as long as the credit card
balance is below the limit and the person makes
their regular monthly payments. But as soon as
the credit limit is reached, many credit
companies will increase the credit limit and
give the person more room to get into debt. I
have personally seen a credit card limit
expanded by $10,000 within three months.
This cycle can continue until the person is
required to make a minimum payment that is more
than they can afford. Now not only do they have
to cut back on the lifestyle they have grown
accustomed to over the years, but they also have
to either increase their income or cut out
things they enjoyed before increasing their
lifestyle with their credit card.
Also what happens if the person is suddenly out
of work or has to take a pay cut or lower paying
job. That's right, the credit card bills keep
coming. And many people rely on the remainder of
their credit limit to supplement their income
until they are working again or can find a
better paying job.
We have seen this cycle in America increase
average credit card balances each year and eat
up the equity in many people's homes. Home
equity loans are used as credit cards to live a
lifestyle that is beyond people's means. Or to
purchase toys they really can't afford to buy
let alone keep and use.
Or the home equity money is used to "pay off
high interest credit card debt" as the ads
suggest. But then people continue the habit of
living off their credit cards and get right back
into debt again.
So what is the answer to America's growing debt
problem? Abolish credit cards? Nationally
imposed credit limits?
How about a little old fashioned
self-discipline? I know it's not in style
anymore but it is still the best policy.
Bottom line: pay off your credit card balance
each month. Don't buy something now and expect
the big end of year bonus to pay off your credit
card. Even if you do get it, you will probably
spend it on something else.
Don't fall into the habit of living off your
credit cards. If you have $1000 of disposable
income to spend each month, whether through a
credit card or in cash, only spend the $1000.
Don't try to make up for extra expense this
month by assuming you can catch up on your
credit card payment next month. It won't happen.
If you have developed bad credit habits, cut up
your credit cards, or only keep one for
emergencies and resolve to pay off the balance
each month. Then create a plan to get yourself
out of debt and stick to it.
You can relieve stress, avoid family conflicts
and sleep better at night knowing that there are
no credit card wolves howling at your door.
© Simple Joe, Inc.
David Berky is president of
Simple Joe, Inc. which sells the Simple Joe's
Debt Eraser PC software. Debt Eraser can help
anyone get out of debt quickly and inexpensively
by creating a
Rapid Debt Reduction Plan. This article may
be freely distributed as long as the copyright,
author's information and an active link (where
possible) are included.