How to Win With Credit Cards
So one of the most common issues readers email me about is credit cards. I lovingly refer to credit cards as “frenemies.” They disguise themselves as friendly faces with their cash back, rewards points, airlines miles and low interest rates. In reality they lower credit scores, get people into debt, prevent loans from being approved and cause financial stress.
Credit cards are great tools for those that can handle them. But a lot of people can’t. They charge services and items they can’t pay off at the end of the month and in turn rack up serious debt. I’ve spoken in the past about the dangers of credit cards. Today I want to tell you a little bit more. Please read this letter explaining some of the most common charges that can lead to debt, financial problems and stress.
1. Charging any of your monthly loan payments.
Putting your monthly car payment or the mortgage on your credit card is only going to lead you further into financially scary waters. You are essentially robbing Peter to pay Paul. Your monthly loan payment is made up of principle and interest charges. When you put the loan payment on your credit card and don’t pay it off at the end of the month you will incur more interest charges. That’s a viscous cycle that will quickly lead you to carry long term debt.
If this is something you’ve done a couple of times or even more than that I am worried about you. You’ve borrowed money you can’t afford to pay back. Try contacting your lender and renegotiating the terms of your loan. Try extending the life of the loan to lower your monthly payments and DO NOT take on any more loans or debt until this one is paid off.
2. Putting your college tuition on your credit card.
Most colleges charge tuition that runs into the thousands. And unless your last name is Gates, Trump or Buffet that kind of money is hard to pay off at the end of the month. I’m not saying you should forgo college if you don’t have the cash to pay for it right away. A good education can help you secure a higher paying job and possibly increase job security.
Instead of charging tuition on your credit card look for alternative payment methods. A lot of students believe they wouldn’t qualify for financial aid because their parents make too much money. That is a terrible assumption. Always apply, the worst they can say is no. Another terrible assumption people make, is believing they can’t get a student loan if they have bad credit. That is not true; there are loans out there that have nothing to do with your credit score. A quick Google search will reveal these loan options.
3. Plastic Surgery
I’m sure you did a double take when you read this one on the list. I feel the need to mention it though because over 10 million people had a procedure performed on them last year according to the American Society of Aesthetic Plastic Surgeons. Major procedures will run you a couple thousand dollars a pop. Even non-surgical procedures will run you a couple hundred dollars each. That’s not chump change, still more and more people are getting plastic surgery. If you lose your job a few months later or an unexpected emergency pops up you might need the extra room on your credit card to get you through that time.
My advice is the same with all luxury purchases such as these. Save up and pay for them in cash!
4. Basic Necessities
Everybody uses credit cards, but it’s those that use them to pay for basic life necessities like gas, groceries, and utility bills that scare me the most. If you can’t afford to pay for everyday expenses like these you are living beyond your means. Each swipe of the card then puts you further and further into the hole.
If you put these kinds of purchases on your credit card and don’t pay it off at the end of the month you need to create a budget and stick to it. Open Microsoft Excel and input the cost of all your bills, total them up and compare that figure to your monthly income. If your outflow is larger than your inflow you need to cut spending…and fast.
You’re stressed and overworked. You convince yourself a vacation is the perfect medicine to cure you, except you don’t have the cash to afford one. So you put it on your credit card and fly off to one exotic destination after the other. The problem with this line of thinking is that inevitably you will come back home, and the bill for those few days you spent stress-free in paradise, will be there, waiting for you. And then you’ll stress yourself out over your inability to pay for it. It doesn’t work; you’ll just end up making your situation even worse.
Instead consider regularly putting money aside into a savings account. This way if you find yourself needing a vacation a.s.a.p., you will already have the cash to pay for it.
Ouch. If you have this bill, it’s likely to be in the thousands. Not an easy bill to pay off if you haven’t saved up for it. Making matters even worse is that the IRS is prohibited from paying credit card companies merchant fees to process transactions. These fees are 1-2% of the total transaction amount that merchants pay to credit card companies in exchange for the convenience of using them. Instead you will be hit by these fees by your credit card company in addition to your tax bill. Double ouch.
If you cannot afford to pay your full tax bill when it comes due, contact the IRS to set up a payment plan. The IRS will tell you to take out a loan or a cash advance to pay off your bill, but their rates are actually some of the cheapest around. Under an IRS installment agreement, in addition to the processing fees, you are charged interest at the current rate plus a late penalty fee.
7. Cash Advances
Cash advances from credit cards are akin to doing your grocery shopping at 7/11. It’s convenient, but it will cost you an arm and a leg. There are no deals to be had there; you pay a premium for convenient shopping. The national average credit card interest rate is 15.14 percent right now according to CreditCards.com. A cash advance interest rate can run you 20 percent and up. So while they may be handy, you’ll pay dearly for it.
If you find yourself in need of cash to get you through till the next paycheck it’s time to reassess your spending habits. This is exactly why I advocate emergency funds! These accounts are designed to help you out when you unexpectedly need money. Put away a little bit every month and dip into it when your paycheck doesn’t quite stretch far enough.
Money is one of the three most common reasons couples break-up. So starting off a marriage incurring a boat-load of debt is like fast tracking your way to marital strife, arguments and couples counseling, all of which are no fun. And trust me when I say that no one will remember what your centerpieces, napkins or favors looked like a month after the wedding. Scaling back your big day is the only advice I will give an engaged couple because starting out a marriage in debt is a bad way to begin a life together.
This list is not an end all be all. There are other charges that can also quickly and easily get you into long term debt with your credit card. Always remember that credit cards are your enemies disguised as friendly faces. The minute you stop paying them, they will begin harassing you and turn you over to a collection agency. Credit cards are for convenience when you don’t have enough cash on hand. They are not to be used as financial tools to live the kind of life you dream about but cannot afford.
Keeping Money in Your Pocket,