Tuesday, October 2, 2007

The Seven Deadly Sins of Credit Cards

I remember the day my first credit card arrived in the mail. A rush of both terror and excitement made its way through me. Terror because I had watched both of my parents go bankrupt due, in part, to overuse and misuse of credit cards. Excitement – because I had a plan. I was going to avoid the seven deadly sins of credit cards and use mine powerfully and thoughtfully.

Can you avoid the following seven deadly sins?

Don’t get angry when your monthly credit card statement is spiralling out of control! Make a commitment to only spend on your credit card that which you can afford to repay in full each month. The interest on credit cards is what can kill you, and paying off the monthly minimum will leave you hand cuffed to your card forever! Get your credit card under control and remember “credit” does not mean “free money”.

Just because you see a new credit card that comes in pink to match your shoes does not mean you need to get it! I recommend only one extra “emergency” credit card – if you’re responsible enough to NOT use it! “Emergencies” does not mean the new XBOX being pre-released! Keep it for emergencies such as medical emergencies or another credit card being denied when you’re travelling overseas due to your credit card company suspecting theft. Also make sure your emergency credit card has no annual fee.

Wo-hoo your credit card company has just offered you another limit increase! STOP! Consider the following:
• Each time you get a limit increase it will affect your overall borrowing ability (the higher your credit card limits the lower your borrowing power for assets like a house!)
• The higher your limit the more someone has access to if you’re the unfortunate recipient of identity fraud
• Banks quite often offer limit increases to people who cannot sustain more debt
• Do you really need the increase or are you just excited you’ve been offered it

Paying off your credit card with another credit card is not the answer! As soon as you withdraw cash from most credit cards, you start paying interest immediately (in most cases). The only time I recommend you consider this option is when transferring the balance of your credit card to another. Then destroy the old credit card! Use the interest free period on the new card (often up to 6 months on a transferred balance) to help completely pay off your credit card debt.

Do you have a shopping problem? There are many great techniques for not overdoing the product envy, here are just a few:
• Put your credit card in a glass of water and freeze it. Commit to not buying anything until the water has melted (no microwaves!) and you’ve had time to fully consider the purchase
• Get a low limit on your card (preferably one that doesn’t have a limit high enough to afford the new Manolos!)
• Limit your online shopping to funds you’ve earned in your paypal account (that’s right – ebay your old stuff before you buy new stuff!)

How many is too many credit cards? This is, of course, an individual topic. For me – I have a personal card and a business card and I look for features such as low annual fees, high points for frequent flyer programs and long interest free periods. Importantly, I still stick to my rule of paying off each card in full before interest is due. A great option for someone who isn’t sure whether they’re ready for a credit card yet is to get a charge card – where you have to put the money into the card before you spend it!

If you feel that your credit card situation is beyond your control. Call your bank or financial institution and organise a time to sit down with one of their staff to organise a payment schedule. The banks have a vested interest in you continuing to attempt payment and can be quite flexible in how they make arrangements for your payment – all you gotta do is swallow your pride and ask!

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