Don't Do Debt.com

Pros and cons of credit card use

A recent comment to this blog asked about the pros and cons of credit card use. Here are a few that come to mind:

PRO: Using credit cards can be used to build credit.
PRO: Credit cards can be used to cover a financial emergency.
PRO: You don’t have to ask for anyone’s permission to spend money or to open a credit card.
PRO: You can do or buy things you can’t ordinarily do or buy, such as traveling, paying for school needs, etc. (I’ve heard of some students who actually pay for their college and/or their books and supplies on credit cards).
PRO: You can earn incentives such as frequent flier miles, something useful for people who frequently travel.
PRO: For those with the “buy now, pay later” mentality, it seems the world is yours when it comes to your first and second credit cards.
PRO: Many people believe (as I once did) that credit cards help conserve your cashflow- meaning that if you charge something to a credit card, you don’t have to use your cash to pay for it.

CONS:

CON: While credit cards can be used to build credit, if they are not used correctly and with regard to your credit report, using credit cards to build credit can quickly backfire and do more harm than good to a credit report. It's important to understand the importance of paying on time, how to demonstrate positive money management, etc. I'd suggest that people should understand credit reports before contemplating credit card use.

Credit card cos increasing already pricey penalty fees

Credit card companies are substantially increasing penalty fees, in some cases as high as $49. An article released by Cardweb.com details the increases in late payments, balance transfer fees and fees for payment by phone by some credit card companies. Click here for the story.

With these substantial penalty fee increases, it's more important than ever to to avoid these costly and often unnecessary fees.

More updates on the way...

Quick tips and your money

When I tell people that I write about credit cards, debt and money, I am inevitably asked about any "quick tips" I might have. So, I thought I'd take a minute to share these with others who might have this same question. Below are a few of these "quick tips":

1). Have a vision for your money (see blog entry below).
2). Be aware of the cost of being in debt: It is in fact very expensive to be in debt. When you break the costs down, you can see the incentive to begin seriously eliminating, or at least, reducing the balances on your high interest credit cards (see entry/article- "Quicksand: Debt's impact on budgeting").
3). Get organized with your money: Late/missed payments can be very costly to the cost of your debt-load and can seriously erode your credit report. It’s important to be organized with your money in order to avoid these and other unnecessary and costly penalty fees.

"Save 10%": A real savings or no?

As I checked out after a long day of shopping at SouthPark mall here in Charlotte, I was reminded of something I like to address every holiday season. Once the sales clerk totalled up what I spent, she asked me, "Would you like to open a Belk card and save 10% today?" "No," I said, "I'm not so good with those credit cards. I tend to get in trouble with them as a matter of fact." She asked more questions and continued to encourage me to open this credit card.

She was very nice and was just doing her job. But I remember wondering to myself exactly how many people this holiday season would be asked this very question and of those, how many would respond by opening an account.

This holiday season, think before you think you'll save. An upfront 10% discount is nice but let's look at how negligible that discount is if you don't repay your balance right away.

Choosing a credit card

A friend of mine chooses credit cards like this: An offer comes in the mail. She entertains the offer, turns it over and then reassures herself she can get a lower interest rate. Seriously. She doesn't consider the costs of using the credit card or the impact her current cards have on her financial situation, only whether she can get a lower interest rate. Sadly, she and her husband are on the haphazard strategy of paying bills. They pay when they have money and a convenient time to sit down and "do bills". NOT GOOD. They pay late fees every month on almost every account they currently have - from credit cards to health insurance and other loans- they don't need more accounts.

When it comes to your money and paying bills, organization is a must and timeliness is godliness in terms of protecting your credit and saving money. Late payments erode your credit history and worse, are very expensive, especially when late on multiple accounts. Think of this: A meager $20 late payment on 7 accounts a month. That's $140/month. Pay late on all accounts for a year, they are looking at $1680 in late payments alone. They, however, see the late fee on each account and it seems insignificant. They don't necessarily do the math in the big picture- to their own detriment.

When choosing a credit card, don't simply consider the interest rate. Think about whether you can afford another credit card and the fees, penalties and interest you'll pay for the life of that account.

Q&A: Credit Card Use (III)

Q: I can't afford to pay my basic bills, I'm nervous about eventually repaying my student loans and it seems perfectly logical that a credit card will help me have more of my money. What should I do?

A: Think twice. Credit cards seem especially easy to manage in the short term but they can become expensive and messy in the long-term if mismanaged.

Q&A: Credit Card Use (II)

Q: Should I use a credit card to build my credit?

A: Credit cards are a big responsibility and mismanagement carries great consequence. Using credit cards to build your credit can backfire and you can quickly do more harm than good to your credit report. Building credit takes time, an abililty to demonstrate positive money management skills, and it's really wise to wait to use credit cards until you understand exactly how they work.

Q: How much debt is too much debt?

A: $2,000 in debt is a lot of debt, no matter how much money you make.

Q&A: Credit Card Use (I)

Q: How many credit cards should I have?

A: The technically correct answer would be one or two. If you have more than one credit card, your obligated to interest and penalty fees on all credit cards in your name. Think of this: You have to pay five credit card bills late one month. A late pay fee = $30. Total = $150 in late fee charges that one month alone. Additionally, your late pays reflect on your credit report (remember late payments erode your credit). The expense of multiple cards can send your money spiralling out of control in little time.

It depends on why you are considering a credit card. If you're hoping a credit card will help build your credit, this strategy can quickly backfire.

The Minimum Payment

One common misconception about the minimum payment: Credit card companies do little in the way of encouraging consumers to pay more than the minimum. The minimum payment is a small percentage of your balance, typically 2-3% and is about 90% interest and 10% balance. Paying only the minimum little to decrease your balance and the overall balance you pay interest on. A higher balance costs you more money in interest. Paying only the minimum prolongs the life of your debt-load.

Paying your minimum on time is certainly critical (timeliness is godliness in the world of credit cards). If you're a chronic late payer or you pay bills haphazardly (every two months was once my strategy), you risk penalties in higher interest rates that cost hundreds or thousands of dollars. Higher interest rates added to your balance can double or triple your minimum payments. Unpredictable minimum payments make it difficult to budget and save money and increase the difficulty to get out of debt.

Cost of Credit Cards

Think of these costs for the simple privilege of using a credit card(s) (AKA: The cost of being in debt):

If $1,000 balance at 10% APR, $100/year.
If $2,000 balance at 10% APR, $200/year.
If $5,000 balance at 10% APR, $500/year.
If $20,000 balance at 10% APR, $2,000/year.

Typical interest rates range from 8% to 14.9%, with penalty increases that can send your APR into 23-26% range.

Let's double those costs:

If $1,000 balance at 20% APR, $200/year.
If $2,000 balance at 20% APR, $400/year.
If $5,000 balance at 20% APR, $1000/year.
If $20,000 balance at 20% APR, $4,000/year.

Imagine the cost of multiple credit cards. Pretty pricey food for thought.