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.

Don't forget...Write it down!

Don't forget to take account of all money outstanding (credit/debit purchases, outstanding checks) to determine your balance when balancing your checking account. Take the current balance of your checking account and subtract outstanding debit and credit charges and any checks- that's how much money you have.

Sounds like an elementary reminder, but too often people forget to write down the checks they've written or the credit or debit charges made with a debit card. Even debit transcations can send you into overdraft status, even if your purchase is approved.

Make it a habit, if you haven't done so already, to write all of your purchases down. This is also helpful in the future when it's time to evaluate your spending habits. You can look at how you've spent your money for the past few months and assess ways to cutback and save money.

Incentive happens: A vision and money

The holidays are now officially behind us. Okay, well actually, tonight marks the end of the holiday season for me as I had one more party to attend this evening. I declined at the last minute as I felt compelled to write about some questions asked of me while travelling around during the past few weeks.

One thing I'm frequently asked after the madness of the holidays comes to a screeching halt, is how to have more money. One person recently expressed concern about her inability to save money, another asked about how to have more money to get out of debt. A mother asked me how to teach her sixteen year-old about money as she recently took on her first part-time job. Other questions have come up, too, but here are a few thoughts I had in response to these questions:

I don't have the perfect answser for anyone. But one thing I live by for myself is this: I have a vision for what I want to do with my life and my money. I have things I want to accomplish:

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.

Teaching Money

Jonathan Clements, personal finance columnist for the Wall Street Journal recently wrote an intriquing article about teaching wealth ("Teach Your Children Wealth: Why I Decided to Close Down the Bank of Dad"). He concludes the article with this: "Want to see how your children's attitude changes when they are spending their own money? Try one of my favorite tricks: Next time you go to the mall, give your kids $10 each to spend, but tell them you expect change. Trust me, you won't get much back. On a subsequent visit, give them $10 again. But this time, tell them they can keep the change. You will be amazed by how much less they spend."

Parents frequently ask me about this very subject. Teaching money is tough and believe it or not, young people pick up spending habits, skills and priorities from parents. When teaching money, give your child ownership, help them visualize and set simple short and long term goals for their money. Money should be a separate issue from others. Be consistent and predictable if giving allowance. But ownership and "keeping the change" are great strategies for helping a child understand value.

Credit Cards & the Big Picture

Here's how credit card debt depletes a paycheck and prevents someone from saving money:

Junior opens a credit card with a 0% introductory rate. He charges $300 to this new credit card and only has to pay $15. He thinks, "Wow, I paid $15 to spend $300. This is easy. A few more credit cards won't hurt." What typically turns out to be a short-lived moment in time, Junior believes he can pay a little extra every month (minimum payments) to buy and do what he otherwise couldn't (by charging it). The real interest rates kick in on his handful of cards.

Simple basics in the big picture of money

As I continue blogging away about my thoughts on debt and today's young people, you'll frequently notice that I refer to "the big picture of money". What is this big picture I am talking about? Here goes...I believe that to truly help a person handle the short term temptation of credit cards and avoid the long term consequences of credit card debt, a young person needs incentive to avoid to avoid financial complications early on. They need to understand the big picture of money. Consider this:

Why "don't do debt"?

Inevitably at some point in all of our lives, we wake up and wish, wish, wish we had more money. This becomes especially relevant when a person's money is committed to high interest credit cards because this sort of debt eats away at extra cash, makes it difficult to have "extra" money after the bills get paid, and the idea of saving money when you're in debt is pretty much tossed out the window.

As I've mentioned, debt is not always a bad thing, but all people deserve (and I'd go so far as to say entitled to) the foresight that oneday you'll need more money to do what you want to do and/or create. Financing your dreams, your life become extremely difficult when your money is already spent.

Basic money skills for everyone

Preserve, protect and make the most of money: Every person should have these very basic skills but no one teaches this information. In fact, most people are lucky if they are given a short class in junior high or high school on balancing a check book. Don't get me wrong, this is an important skill to have, but what good is it if a person is not taught where the money that's needed to balance the checkbook comes from.

It's time for the younger generation to explore where money comes from, how much it costs to live, how the bills get paid for, how a paycheck breaks down and what to do with your money when you start earning it. To get ahead in life, everyone should have basic money skills.

Good debt vs. bad debt

You've heard debt is good. You've heard debt is bad. Which is it you ask?

Debt is good when it's used to invest or advance one's future. Debt is bad when it harms your future. I've seen and heard too many horror stories about the stress of thousands of dollars on credit cards on one family or individual. It's not right that millions of people share one thing in common: the burden of too much credit card debt.