By Mary Fox Luquette
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Everybody has credit cards and usually a person has many credit cards. They make life easier, simplify purchases, provide a means of record-keeping for items bought, and they make buying so easy that many people have become buried in debt. Managing credit cards has now become a financial necessity.
Even though there are a wide variety of credit cards available, not all credit cards are alike. Typical charge cards, like American Express or Diners Club, are designed to be a convenient method of paying for a purchase with the balance on the card being paid in full every month. This type of credit card is not designed to be a loan, which means that the card carries an annual fee but may have no interest payment required since the balance is paid in full.
The other type of card, the one that is causing the indebtedness problem, is designed as a loan. It may not have an annual fee, but it may charge a hefty interest rate which may be as high as 20 percent. This type of card should be used sparingly and only for those purchases that have a long life expectancy. It is not wise to have a credit card balance that lasts longer than the item bought.
The average person needs only two credit cards - one of each type. Managing credit cards is not difficult. When making purchases, people should consider using cash first, especially if the item is short-term, like groceries or dining out. The idea is called "matching principle" - match the type of payment to the life expectancy of the item bought. Short-term items should be paid by cash, credit should be reserved for long-term assets.
Here are a couple of suggestions that would help a person break the credit card habit.
One method is to spend one month going cold turkey without the credit card. The idea is for a person to buy only the necessities for that month (and the necessities would be stated in writing before the month began). At the end of the month, whatever savings have been accomplished should be used to pay on the credit card balance. Gradually the credit card would be paid off.
Another exercise that has proven to work is to examine each card's interest rate and then eliminate cards that are unused or unnecessary - for example, specific department store cards that have not been used in years - retaining an open account (zero balance) on the credit card with the lowest interest rate. For the cards with a balance, they should be paid down until they are all paid off.
I suggest that a person pay the minimum required balance on all cards except the one with the highest interest. That one should be paid off as aggressively as possible. Once it has been paid in full, the card should be cut up and the card company should be notified that the account is to be closed.
It is important to require from the credit card company proof that the account has been closed. Then the credit card with the next highest interest should be aggressively paid off until only one remains. This last one should be paid off, also, and then the card should be reserved for those purchases that cannot be paid in cash - like a new roof or a new refrigerator. It is best to pay any balance on the card within two years.
Credit cards are a modern convenience but unfortunately they have also become a modern necessity. The best advice I can give anyone is: You control the card, don't let it control you.
