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How To Know If You Really Need A Credit Card

Video thumbnail for youtube video How To Be A Smart Credit Card UserSo you think you need a credit card? You’ve seen those great offers such as “Get our card and enjoy 2x cash back” or “Apply for our card today and earn 1,000 bonus points.” These offers sound oh, so appealing. Plus, having a credit card means a new freedom. You see something you would like such as a new tablet computer or an HDTV and you could buy it instantly instead of having to spend months saving for it. But before you fill out that application, there are some things that you need to think about.

How good are you about self-discipline?

Millions of Americans have gotten seriously into credit card debt because they lacked the self-discipline necessary to use their cards wisely and sensibly. No matter how much fun having a credit card might seem, it’s important to understand that the credit card companies are not your friends. They’re there for one purpose and one purpose only and that’s to make money. And there’s no way they can make money off you unless you go into debt. If you charge a few things on a credit card and then pay off your balance at the end of every month, the credit card company earns nothing. What it wants you to do is carry a balance forward so that it can charge you interest and then compound the interest. If you’re not familiar with compounding it’s where you end up paying interest on interest.

An example of how compounding works

Just as credit card companies are not your friends either is compounding. Suppose you owe $5000 and make just the required minimum payment each month. If that card has an interest rate of 19% it would take you 41 years to pay off that $5000 and cost you $16,198 in interest charges alone.

Perks are a lame excuse

If you decide to sign up for a credit card because of all those mouthwatering perks such as cash back or airline miles, you’re just making up excuses. You should sign up for a credit card only because you need it. Credit cards can be great for emergencies or to buy something on a sort of installment plan basis but as noted above if you’re not careful your debt could get totally out of control.

Will it fit your lifestyle?

If you decide you do need a credit card, it’s important to make sure that it fits your lifestyle. When you take that card to a mall will you have the self-discipline necessary to buy only the things you need or would you be buying stuff to fit a lifestyle you think is necessary or to impress your friends. If the answer is the latter and you don’t have much self-discipline, this will have a huge impact on your psychological and financial well being.

Are you ready to handle a debt?

Are you fully aware of what will happen if you don’t pay off your balance at the end of that first month? When you carry a balance forward – as illustrated in the example given above – you can fall into the trap of compounding interest. The smaller amount you charge, the smaller amount you will have to repay and the easier it will be for you to pay off your balance at the end of that month. However, if you fall into the trap of paying just the required minimum payment each month it will take you much longer to pay everything off and you will be charged that nasty 19% or 20% interest fee.

Do you have a stable income?

It’s just not a good idea to get a credit card unless you have a stable income. You need to be a full-time employee and not a contractor or a part-time worker. You need to know you will have money at the end of your billing cycle to pay off your balance without fail. If you work on a contract, it could be ended with little or no warning and there you’d be stuck for a credit card payment and without enough money to make even the minimum payment. If you’re a part time worker you could see your hours cut back with little or no warning and find yourself in the same fix.

Have you budgeted for that new expense?handwritten family budget

If you haven’t gone through the exercise of developing a budget, you need to do so. It’s not all that complicated. Just add up all of your fixed monthly expenses, then your variable expenses such as food and clothing and subtract this total amount from your monthly income. If you want to have a credit card you need to have enough money left over after all your expenses to pay your credit card bill and not just the minimum monthly payment.

How do you plan on using a credit card?

Is it your intention to buy new appliances on an installment basis? Is your goal to accumulate points for an airline flight or for your shopping? Or maybe you want a credit card to help you establish a good credit history? What you need to do is compare the cards available and then sign up for the one that best fits your needs. That way you would be able to maximize your benefits.

Consider a debit card instead

If you’re at all concerned about your ability to handle credit and debt you might consider getting a debit card instead. Debit cards give you all the same benefits as a credit card. However, they’re linked to your checking or savings account so that you can’t spend any more money than you have in that account. And a debit card does offer several benefits:

  • Debit cards have no interest charges. You’re using your own money and so long as you use the card sensibly it won’t cost you anything.
  • Carrying a debit card is easier and better than carrying cash. Cash can be lost or stolen and if so, there’s no way to replace it. On the other hand, if you lose your debit card all you have to do is notify your financial institution. It will cancel the card and send you a new one. And if there are illegal charges made on the card, you should be able to get your money back — though it may take as long as 60 days.
  • When you use a debit card, you have the option of getting cash back. I use my debit card at the grocery store and almost always get $20 or $40 cash back. That’s easier than going to my bank and, unlike ATM machines this costs nothing.
  • Debit cards are more secure than credit cards. When you use a credit card all you’re required to do is sign a receipt. But when you use a debit card you must type in your four-digit pin number to validate the purchase. Many stores prefer this because it reduces their risk. Plus, it’s much easier for a thief to use a credit card than a debit card because he or she has no way of knowing your pin number.

Keep all your receipts

Whether you get a credit or debit card, make sure you keep all of your receipts. This is an easy way to track your spending so that you will know where your money’s going. You would be able to sit down at the end of a month, take out all of those receipts and see exactly where your money went. When you add this to your fixed expenses, you’ll know if you’re spending exceeded your income or not. If so, you will need to make some adjustments in your spending.

Facts About Credit Scores and Credit Cards That Might Surprise You

man holding multiple credit cardsIf you’re like us you probably take credit cards pretty much for granted. They are nice little pieces of plastic that you can whip out whenever you don’t have enough cash to pay for a purchase or when you’re running a little short and it’s not yet the end of the month. If you’re a savvy credit card user you don’t charge anything that you can’t pay off when your statement roles in so you never pay any interest charges.

The top cards

Have you been tempted to sign up for one of those cards that offer mouthwatering rewards. The top ones come with significant rewards from 2% to 5% cash back. Some even offer 0% interest for an introductory period of time. However, what these credit card offers don’t tell you is what it takes to qualify for one of them.

The credit card companies have criteria called “underwriting standards” for their cards that are closely guarded secrets. The credit card companies are much like Coca-Cola that refuses to release its recipe for Coke. The credit card providers keep secret the criteria they use to approve applicants for their most exclusive cards. However, there is information available from the site CreditKarma that provides insight into what it takes to get one of those top rewards cards. CreditKarma recently released a list of the lowest and average credit card scores of people who had been approved for some of the best and most exclusive credit card offers.

Fact #1: You could have a score in the 600s

The first surprising fact that can be gleaned from this information is that you don’t have to be a member of the “700 club.” In other words, you don’t necessarily need to have a FICO score of 700 or above to qualify for one of the top cards. While the average credit scores for people who successfully obtained the top cards did range in the low 700s, the lowest approval scores dipped well in the 600s. This is clearly because other factors are considered such as past payment history and income. This helps explain why the top credit cards from companies such as Citi, Barclaycard and Discover went to applicants with scores in the 600s.

Fact #2: 0% interest cards require a top score

A second surprising fact is that those 0% interest balance transfer cards do require a top credit score. If you’ve checked into the cards currently available, you would know that the top offer is for an 18-month introductory period. The irony is that these credit cards might be designed to help people trying to get out of credit card debt but the best ones do require a top credit score. For example, Discover and Citi are granting their 12- or 18-month cards only to people who have average scores in the low to mid-700s. If your credit score is in the mid 600s, the best you will probably be able to qualify for is one that lasts just six months.

Fact #3: Higher scores get better rewards

A third maybe not-to-surprising fact is that the higher scores get the bigger rewards. The best of these cards usually offer 2x points, cash or miles on almost every purchase. As you might expect, the average credit score required to get these cards is markedly higher than a “good” credit score. As an example of this, one version of the Barclaycard Arrival World Master Card offers 2x miles on all purchases and significant bonus miles, too. However, successful applicants for this card had average credit scores of nearly 740.

Fact #4: Students can have lower scores

Here’s one you might definitely expect, which is credit cards for students require much lower scores. In fact, the available credit score data shows that the average scores for applicants who are approved for these cards fall below 700. And the lowest scores that are approved for student cards are in the low 600s and, in some cases they even fall below 600.

Fact #5: Approval is just the start

If you are approved for one of these top credit cards this is just the start. Your credit limit and interest rate will be calculated based on your credit scores and other underwriting criteria. If you have a high score you will have higher limits and lower rates.

Something to keep in mind

If you do apply for one of the top rewards cards keep in mind that credit score information is just one factor in the card provider’s underwriting criteria. Plus, as card issuers fine-tune their underwriting standards, these criteria continually change – especially as the prime interest rate changes.

The downside of credit cardscouple worrying about finances

It doesn’t really matter much the rewards you could earn from a credit card if you’re continually racking up debt. You might think that getting 2x cash back on your Visa or MasterCard is a really good deal – but that’s only if you’re paying off your balance at the end of each month. If not, you could be racking up interest charges at the rate of 19% or even higher, which would totally wipe out those cash back rewards. The credit card companies have a grace period of anywhere from 25 to 30 days where you can pay off your balance before you begin to get hit with interest charges. If you charge a purchase the day after your card has “rolled over,” You might get nearly 2 months before that charge would come due. That’s like free money.On the other hand, if you don’t pay off your balance before or on the date it’s due, you will start piling up interest charges and could end up spiraling into a black hole of debt. Here’s an example of what we mean. If you charged $5000 on credit cards that had an average interest rate of 19% and made only the minimum monthly payment of $125, it would require roughly 273 months to pay it off (nearly 23 years) and would cost you $6,923.14 in interest charges.

If you get into credit card debt

If you’re getting to the point where you’re making late payments on your credit cards or even skipping payments, there is a good solution. It was developed by a financial expert named Dave Ramsey and is called the “snowball” method for paying off debt. The way it works is very simple. You rank your debts in order from the one with the lowest balance down to the debt that has the highest. You then concentrate on paying off that first debt being sure you continue to make the minimum payments on all your other debts. Once you have that firs card paid off, it will be easier to off the card with the next lowest balance and you will have more money available, then on to the third debt and so on.

Here’s a short video where Dave Ramsey explains more about why it’s important to get out of debt and   his snowball method.


Alternately, you could do as other financial experts counsel and arrange your debts from the one with the highest interest rate – which is costing you the most money – down to the one with the lowest. You would then focus on paying off the one with the highest interest rate then move on to the one with the next highest interest rate, etc. There are people who believe strongly in one or the other of the strategies but what it boils down to is choosing the one that makes the most sense to you.

Be A Smart Spender: Should You Pay In Cash Or Credit

credit and billsPracticing smart spending is necessary if you want to keep yourself out of a financial crisis. However, there is one confusing issue that usually baffle consumers: should they spend in cash or credit?

If you really want to be a smart spender, you need to understand how various purchasing methods can affect your overall financial standing. Usually, this involves choosing between paying in cash or credit cards. Staying out of a financial crisis does not necessary mean you have to get rid of debt completely. On the contrary, being a smart spender will help you face debt without any fear. That means you don’t have to be scared of credit cards.

To help educate you, let us discuss the difference between paying for cash and credit cards.

Why it is wiser to make purchases in cash

Let us start with paying in cash. There are so many benefits when you are paying in actual cash. Let us enumerate them one by one.

  • It keeps you from overspending. This purchasing method will not make you overspend your monthly budget because you only spend the money that you have at the moment. When it runs out, you have no choice but to stop buying things.

  • It encourages you to use your budget plan. To be a smart spender means you have a budget planner worksheet that serves as your guide and monitoring tool for your financial transactions. This is how you will make sure that you will spend your money on the important expenses on your list. Otherwise if you could spend your money on unnecessary stuff and end up with nothing when the important bills come knocking in.

  • It discourages you to make unnecessary purchases. There is a psychological effect to being separated from cash so you can expect that you will naturally think about every expense before you make them.

Basically, these are the benefits of using cash to pay for purchases. You may think that this will already make you a smart spender but you have to understand that there is more at stake here. You must consider that paying only in cash will leave your credit history a bit thin. That means you will have a low credit score.

When is spending with credit rewarding?

Now turning over to credit card spending, it can certainly solve the problems of cash only purchases.

  • You will have a credit history. Since you are putting yourself through debt, you will be having some adequate credit history in your report. This can help you build up your credit score.

  • There are reward programs. Most credit cards come with rewards and even cash back programs that you can really benefit from. At least, if you know how to use it properly.

  • The cashless transaction keeps your money safe. You don’t have to go around carrying too much cash in your wallet. You can actually keep it safe. When you lose your cash, that is it. When you lose your card, you can have your creditor freeze the account for you so the thief cannot use it.

  • Proves to be useful in emergencies. While this is still debt, you can benefit from the unlimited (or near unlimited) money that you can use. It will help ease your worries about falling short.

While all of these are great, it also presents a couple of important issues on its own.

  • Puts you in debt. First of all, a credit card will put you in debt. When you use it, you are not really paying with your money. In truth, you are paying with the creditor’s money. You have to pay it back.

  • You can end up paying for more than the value of your purchase. When you let your credit card balance be carried over to the next month, you will have to pay interest on that. And we all know how these cards are notorious for their high interest rates. You will be wasting your money on that. This is why most financial experts will tell you to avoid using credit cards to buy products that lose value over time.

Which is the smarter spending practice?

That still leaves us with an unanswered question: which is the better spending method? If you want to be a smart spender, you may want to find the balance between the two.

There are certain purchases that work well with cash and there are those that is perfect with credit cards. As mentioned, product that will depreciate in value should not be bought in credit – that means you have to use cash for it. But if you want to maintain a good credit history, you can keep on using your credit card and then pay up the balance in full before the grace period ends.

If you think about it, being a smart spender is all about planning and knowing where to put your money. It involves a fair amount of analysis but there are tools that you can use to help you with this. You can seek out the tools from Fox Business or Yahoo Finance. They have great tools that will help you realize how much you are actually spending.

What Is The Issue With Medical Credit Cards?

medical professional with cash in the backgroundWhen you are sick, you want the peace of mind that comes with knowing that you can afford your payments. This is not the time to be worrying about your finances because you need to concentrate on getting better. Sometimes, the stress is what aggravates the whole situation. So you want to make sure that this is a problem that you will not worry about when you get sick.

This is probably why people opt to get medical credit cards. This is a limited-purpose credit card that you can use on health related costs. Usually, people use this for expenses that are beyond the Medicaid/Medicare coverage – or other private health insurances.

The problem with health care credit cards

While the main intention is a good one, this type of credit card poses a lot of issues. We came across an article from Kiplinger.com and they mentioned a couple of problems with medical credit cards. They said that using these will not really help you with your health – it could even make it worse. Here are the important facts that are mentioned about these credit cards.

  • It is the health care providers who offer the option to patients. They give the option of paying for the treatment with medical credit cards. Although they do the talking, these cards are owned by financial institutions like Wells Fargo, Citigroup, etc.

  • The cards are usually for expenses that are not covered by government or private health care insurances like dental, audiology, vision and other similar treatments. It can also cover vet-related expenses.

  • The medical credit cards are offered with deferred interest – this means the consumers will not pay interest as long as the full amount is paid back in 6 months. Depending on the card, this can reach up to 2 years.

These facts shows a lot of issues that we should have with these medical credit cards.

  • Since cards are offered through the health care provider’s office, the consumers availing it are not scrutinized for their ability to pay.

  • Since the interest is deferred consumers are more tempted to use it more without considering how much they will end up paying on the service.

  • There is a possibility that consumers will skip negotiating with health care providers.

  • Offering the card to patients is a tricky way to encourage credit card use. Since they are vulnerable, they will be more inclined to accept the card without really thinking about the repercussions of using it.

  • It is a financial trap that will only benefit the health care providers because they will be paid by the credit card company immediately. It will not help consumes but instead, it will endanger them by putting them through so much debt.

  • It shields the rising cost of health care services and the interest rate from the cards will heighten that further.

  • Although the interest rate on the charges will only take effect after a certain period, it will be imposed on the original amount – and not the current balance. So let us assume that the patient has a $1,000 bill and they have been paying without interest for the last 6 months. When the interest rate kicks in, they will still be charged on the original amount owed – $1,000.

  • Those offering the credit cards do not explain all of these and they are not held accountable if the patients misunderstand the details of the card. This is not yet covered by any law that protects medical credit card users.

What is sad for this scenario is the fact that those who are using it are usually the elderly or low income families who have no cash or health insurance to help with medical expenses. This is definitely an issue that the government has to address to head off any lasting problem in the future.

Is it wise to rely on cards for medical expenses?

In the end, we are confronted with the question about using credit cards for emergency situations. What are the emergency fund best practices that you should follow? Does it include the use of medical credit cards?

In all honestly, it is unlikely that this will be one of the practices that you should follow. Using credit cards for emergency situations means you are more likely to make the wrong financial decisions. You will be in a vulnerable state and that makes you in an irrational state of mind.

The best option for you is to build up your cash emergency fund. That way, when you need the money for your medical expenses, you don’t have to worry about it. When you pay with credit cards, you still have to think about where you will get the money to pay for that. After all, you paid with the creditor’s money – not your own.

If you build up your cash reserves and you get in an emergency, you can pay with cash. We all know that it is more psychologically restricting to pay in cash and that makes us more hesitant to spend. It will encourage us to negotiate with health care providers for a lower rate on the services they will give us.

If you like the additional security, that is when you should use medical credit cards. But you should never use it as your primary source of funds.

In case you have acquired so many debts already, here is a video that will tell you where to find credit card debt help.

On Managing Multiple Credit Cards Without Ending In Debt

man holding multiple credit cardsA lot of people have learned their lesson when it comes to debt. They want to keep themselves from this dreadful credit problem because it is very easy to fall into it and tough to get out of. The high interest rate and the finance charges are enough to grow your debts into an amount that is difficult to recover from.

Sometimes, consumers choose to avoid credit card debt by eliminating these plastic cards from their lives entirely. There is some logic to this because if you remove the temptation to spend, you will not land in debt. But then again, that is not how you solve the problem. The real culprit here is your inability to control yourself. Instead of disciplining yourself, you will sacrifice your credit score by cutting off your multiple credit cards. Closing an account decreases your credit rating and that can prove to be damaging for any financial opportunity that you may have in the horizon.

While financial experts advise that you should only own one or two accounts, what can you do if you already have multiple credit cards? Well you have the option to keep them.

Tips to retain several credit cards and still be debt free

Keeping several credit card accounts can be a risky move but only if you do not know how to manage them properly. There are techniques to make sure that these multiple accounts will not land you in debt.

  • Define the purpose of each card. It is important to categorize where you will use your card. Make sure you use it where it is most able to get rewards. There are credit cards that are great for travelling and there are also cards that will give you great discounts in groceries or restaurants. Know your multiple credit cards so you can maximize the benefits that you can get out of them.

  • Budget the use of your cards. Now that you know the purpose of your cards, you should make sure that it is plotted in your budget plan. For instance, the credit card for clothes must have a specific budget every month. The same is true for your food and groceries. If you use your credit card for these, you have to allocate a budget for each and put it aside. Do not spend that cash for something else.

  • Pay your balance in full every month. The reason for the previous tip is to enable you to pay for your balance every month. This is how you stay away from finance charges and the effects of high interest rates. This is how you stay out of debt.

  • Do not be late with payments. Another factor that can increase the amount that you have to pay for is when you do not meet the deadline of your credit card payments. Since you have multiple credit cards, it may be beneficial for you to have the dues dates fall at the same time and right after a paycheck is released. This will keep you from forgetting to pay them.

  • Track your expenses carefully. It is also very important for you to track your expenses. Do not wait for the billing statement to arrive before you take note of what you are spending. If you are scared that it can be tedious, you can check out ComputerWorld.com. They have a list of smartphone applications that can help you track the expenses that you make every month – both for cash and credit transactions.

  • Get rid of credit cards that charge annual fees. If you own cards that charge annual fees, have them waived. If not, downgrade them to an account that does not have this fee.

It is possible to own multiple credit cards as long as you can stay organized. If you can control where you use your credit card and you are never reckless, then the chances of you landing in debt will not happen.

Reasons why you still have a lot of cards

Point in fact is, credit cards can help you enjoy a better future. It does have benefits and it goes beyond the cashless transaction. There are many reason why you would want to keep your multiple credit cards and here are some of them.

  • You can’t afford to lower your credit score at the moment. As mentioned, closing your credit cards will affect your credit score. So if you are gearing up to make a huge loan for a home or a business, you might want to refrain from closing your cards. This will lower your score.

  • You want to categorize your credit spending. One card to pay for all your expenses might be a bit more difficult when you want your spending categorized. Having one card for certain expenses will help make category spending easier to track.

  • Your lifestyle is able to benefit from reward points. If you are the type who is able to maximize the rewards for various credit cards, then feel free to keep all your credit accounts. These rewards can save you a lot in the long run – as long as you pay the full balance of your debts on time. That way, you only pay for the value of what you purchased.

  • You don’t have a problem with credit card temptations. Lastly and probably the most important reason is you have no problems curbing the temptation of spending on your credit card. People who cannot control their spending and does not have the discipline to track their expenses will not benefit from having a lot of cards.

As you can see, changing your habits will allow you to enjoy the perks and benefits of using multiple credit cards. You don’t have to eliminate it totally from your financial life.

About College Students And Credit Cards

College student thinking while holding credit cardGoing to college entails a lot of responsibilities for your child. This is the time when they will start to yearn for their independence. They will live on their own and they will have to find their way to survive despite being far from you. They have to rely on their own resources for minor and sometimes even major needs. This is the trial period wherein they will test how ready they are to be independent of their parents.

As difficult as it may be for you to let them go, it is important that you equip them with the right tools that will help them cope with everything that they need while away from you. One of the things that they will need is constant financial support. We all know how expensive college can get. While other children get part time jobs, the main bulk of their financial needs will be provided by you. But despite that dependence, you need to help them learn the right financial management skills that will keep them from going wild during their short stint on campus.

Is it a good idea to give your college student a credit card?

One of the toughest decisions is giving your college student a credit card. We all know how dangerous it is for anyone to possess cards. If you got yourself in debt and you had been paying off your dues, how susceptible do you think your child will be to the same fate? If you who had been a credit holder for quite some time cannot protect yourself from credit card debt, what more a first timer?

However, you know that you need to give your child a credit card because it will help them through college. Here are the benefits of giving them this card.

  • Gives them access to emergency funds.

  • Allows them to build up their credit report.

  • Provides them with a venue to practice proper financial management.

  • Introduces them to the concept of debt and how to pay it off properly.

  • Keeps them from losing cash during transactions.

Despite all of these benefits, you need to keep in mind that some of these are not common knowledge. You need to orient your child about it so you they understand the concepts of debt, payments and financial management. Failure to do so can lead to your child being buried in too much credit card obligations.

There are many stories of new graduates who found themselves under so much debt – that is because of both student loans and credit cards. You need to make sure that your child will not fall into the same statistic. We all know how ugly credit card debt can get so it is best to equip your child with the right knowledge about it.

Credit card lessons you need to teach

Before you can issue one to your child, you need to instruct them about various lessons about credit cards. Education is the primary weapon against debt and of course, following the right practices. But to be able to get the latter, you need to initiate by doing the former.

Here are the lessons that you need to teach your college student about credit cards.

  • Credit cards purchases are done with borrowed money. Your kid needs to understand that credit means borrowed money. Every purchase made must be paid off. More importantly, if that is not done within a specific time frame, they will have to pay more than actual price of the purchase.

  • Credit card companies do not want to be kept waiting for payments. Just like you need to pay off clothes and your food before leaving the store or restaurant, credit card payments are expected immediately. Unless the purchase is advertised with a zero interest installment plan, the debt has to be paid off immediately. Otherwise, you will have to suffer the interest and penalty fees that will be imposed on the debt.

  • Credit cards have a grace period that eliminates interest. Some people fail to pay heed to the grace period. You need to teach you child about this because it will keep you from paying unnecessary interest fees.

  • Credit cards should only be used for emergencies. It is not advisable to use credit cards for ordinary everyday purchases. You need to realize that when you do, your balance may end up overrunning your payments. If you cannot pay the full balance, it will grow and grow until it becomes too much for you to pay off. Do not let your child end up this way.

  • Credit card receipts and statements must always be double checked. People can make mistakes and the same is true even for credit card companies. Make sure your child is being asked to pay only what they purchased. If they find entries that they did not make, teach them how to call up the credit card company. This will help them identify if they had been a victim of identity theft.

Credit cards can teach your child valuable lessons about debt, spending habits and financial responsibility. Just make sure that the lessons are deep rooted before you have them apply it on their cards.

Also, make sure you get the best rates based on your child’s spending habits. There are various options in terms of credit card types. Go to websites like Credit Cards or Bankrate. They compare various cards and their respective interest rates. You should be able to find the right card that your college student can benefit from the most.

Do You Know The Biggest Credit Card Mistake You Could Ever Make?

College student thinking while holding credit card

You probably already know some of the credit mistakes you could make. For example, you probably understand that not paying your bills on time is one of them. You might also know that letting a bill go to collection is a mistake. However, there are some credit mistakes that are not so apparent.

The biggest credit card mistake – closing credit card accounts

There it is. The worst credit mistake you can make – and one that you may not even be aware of – is trying to improve your credit score by closing credit card accounts.

Are you surprised?

This could come as a surprise to many people and could be startling news for people who have worked for years to pay off a big credit card debt. You finally make that last payment and just can’t wait to call the card’s consumer service department and tell it to cancel your card immediately.

Resist the temptation

As tempting as this might be, take a deep breath and back away from the telephone. The fact is, this could be the biggest mistake you could ever make – depending on your financial situation. And it could be years before your see the repercussions of this. That’s because if you have a credit card account that shows zero delinquencies, it will stay on your report for 10 years after you paid if off. And this will help your credit score.

Of course, after those 10 years, it will drop off your credit report and you’ll lose all of the good history that’s associated with the account. Plus, your overall length of credit history will drop when that account does go away and your credit score will take a hit accordingly.

If you close the account

Conversely, if you close that account it will drop off your credit report immediately, which will damage your credit score. The reason for this is something called your “credit utilization ratio.” This makes up 30% of your credit score and is a fancy way of looking at how much credit you have available vs. how much you’ve used. As an example of how this works, let’s suppose you have combined available credit of $15,000 and you owe a total of $2000. You would then have a debt-to-credit ratio of about 13.3%. This will have no effect on your credit score. However, if you close, say, two of your credit card accounts, your combined available credit might drop to $5000 and your debt-to-credit ratio would balloon to 40%, which would have a very adverse effect on your credit score.

There are exceptions to this credit card mistake

Of course, there are exceptions to this rule. There are times when you might want to close a credit card account. For example, let’s suppose you’re able to find a card with a lower interest rate and better rewards and with a credit limit that’s at least equal to or more than the one you’re thinking of closing. In this case, closing the other card could make sense. Alternately, you might be able to raise the credit limits on your other cards to make up for the hit your debt-to-credit ratio would take if you do close that one card.

Tips for closing a credit card account

If you have good valid reasons for closing a credit card, there are three things you could do to minimize the damage it might cause to your credit score.

  • Pick the right card. Do not close the card that you’ve had for the most time or that has the highest credit limit or the lowest interest rate and fees. Choose a card instead such as a store credit card as they usually come with the lowest credit limits and the highest fees.
  • Choose the right moment. Don’t close the card right before applying for a loan. This could result in a higher interest rates. If you do need to close the card, wait until you have been approved for the loan.
  • Watch your ratio. Before you close that card, see if you can get higher credit limits from the cards you already have. But don’t do that unless you first talk with a credit card company rep to make sure this won’t generate a hard inquiry.

Credit can be your friendSmiling woman with pen, paper, calculator

The financial guru, Dave Ramsey, advises you to avoid credit entirely. We disagree with this. Credit can be your friend. In fact, if you’re typical, credit can help you achieve goals such as buying a home, a car or achieving financial security. The important thing is to use it wisely. Watch your debt-to-credit ratio and make all of your payments on time every time. Try to not carry any balances forward because you would then be required to pay interest, which is just money out of your pocket.

More tips about credit card mistakes

Here are some other mistakes you could make with credit cards. Don’t …

  • Ask for a lower limit
  • Pay off an installment loan early
  • Open a bunch of cards at once
  • Settle a debt for less than you owe
  • Use prepaid cards to rebuild your credit
  • Check your credit daily
  • Stop using your credit cards entirely

How the credit card companies make money

The credit card companies don’t make much money if you pay off your balances every month. Their business model is based on the fact that once you start carrying balances forward, you’re likely to begin making just their minimum monthly payments.

Next time you receive a statement from one of your credit card companies, compare the minimum payment required to your interest charge for that month. It’s likely that the minimum payment will be about the same as the interest charge. If this is the case, it means that so long as you make only the minimum payment, you’re doing nothing to reduce your balance and could literally be in debt forever.

Here’s a short video that reveals five credit card mistakes to avoid at all costs.

5 Steps To Better Debt Management

One of President Bill Clinton’s more memorable lines was, “I feel your pain.”

If you’re feeling stressed out about your debts, I feel your pain. This is because I, too, have had serious problems with debt. In fact, there was a time when I had a sick wife, three small children and a pile of bills that almost reached to the ceiling of our little house. Fortunately, these days are behind me – thanks mostly to the fact that I learned how to better manage my debts.

1. Analyze your debts

The first important step into managing your debts is to sit down and analyze them. This may be a very unpleasant task. It’s just not much fun to sit down and face the reality of how much you really owe. In fact, it can be a bit overwhelming. But it’s important that you learn exactly where you stand. One good way to do this is by using a spreadsheet. You may already own Microsoft Excel as part of Microsoft Office. If not, you could use Google Docs or Open Office.org – both of which are free. Of course, if you don’t have access to a spreadsheet program, you could do the same thing with a ruled piece of paper.

The first column of your analysis should be a list of your debts by creditor. Second should be the amount you owe on each of them, followed by their interest rate. Next, you will want a column for the balances owed on each of your debts and then one on their due dates – or the date of the month your payment is due. Finally, you will want to have a row at the bottom labeled “Totals.”

If you’re not at all familiar with spreadsheets, here’s a video that shows how to create one using Excel or OpenOffice.

2. Prioritize your debts

One of the best things about using a spreadsheet is that it will allow you to “sort” your data. In this case you will want to sort your debts by their balances. You should be able to do this by highlighting a column and then clicking on Sort. The column to select is the one titled Balances and you will want to sort it from lowest to the highest. This will generate a list of all of your debts from the one where you owe the least amount of money to the one where you owe the most.

3. Begin paying off your debts

Here’s the good news. The worst part of this exercise is over. You’ve listed all of your debt and you now know the interest you’re paying on each, their balances and the total amount you owe. You’ve sorted your debts so they’ve been prioritized from the smallest to the biggest. As you might guess, the next step is to start paying them off.

Many financial experts believe that the best way to pay off debts is by “snowballing” them. The way this works is that you first do everything possible to pay off the debt with the smallest balance while continuing to make the minimum payments on all your other debts. Once you pay off your smallest debt, you will have extra money available you can use to begin paying off the debt with the second lowest balance and so on. Each time you pay off a debt and have more money available to pay off the next one, you will create even more momentum towards your ultimate goal of becoming free.

There are really two ways to snowball debts. The first, as explained above, is to order your debts by the amount you owe from the least to the most. A second way is to order them from the debt with the highest interest rate down to the one with the lowest. Which of these is best? Not even financial experts can’t agree on this. Each of these strategies has its pluses and minuses.

The reason why snowballing debts is a good option for many people is that it works on human psychology. If you pay off the smaller debts first, you and your family will see fewer bills as more individual debts are paid off. This provides ongoing positive feedback on your progress towards eliminating those debts.

Here, thanks to the online encyclopedia Wikipedia, is an example of snowballing debts.

A person has the following amounts of debt and additional funds available to pay debt (the debt is listed with the smallest balance first, as recommended by the method):
• Credit Card A – $250 balance – $25/month minimum
• Credit Card B – $500 balance – $26/month minimum
• Car Payment – $2500 balance – $150/month minimum
• Loan – $5000 balance – $200/month minimum
• The person has an additional $100/month, which can be devoted to repayment of debt.

First two months – under the debt-snowball method, payments for would be made to debtors as follows:
• Credit Card A – $125 ($25/month minimum + $100 additional available)
• Credit Card B – $26/month minimum
• Car Payment – $150/month minimum
• Loan – $200/month minimum

Third month balance (presuming the person has not added to the balances, which would defeat the purpose of debt reduction) – Credit Card A would have been paid in full, and the remaining balances as follows:
• Credit Card B – $448
• Car Payment – $2200
• Loan – $4600

Third month payments – the person would then take the $125 previously used to pay off Credit Card A and apply it as additional payment to the Credit Card B balance, which would make payments for the next three months as follows:
• Credit Card B – $151 ($26/month minimum + $125 additional available)
• Car Payment – $150/month minimum
• Loan – $200/month minimum

Three more months (six total) – Credit Card B would be paid in full (the final payment would be $146), and the remaining balances would be as follows:
• Car Payment – $1750
• Loan – $4000

Then the person would take the $151 previously used to pay off Credit Cards A & B and apply it as additional payment to the car loan balance, which would make payments as follows:
• Car Payment – $301 ($150/month minimum + $151 additional available)
• Loan – $200/month minimum

It would take six months to pay the car loan (the final payment being $240), whereupon the person would then make payments of $501/month toward the loan (which would have a $2800 balance) for six months (with the last payment at $234).

Thus, in 17 months the person has repaid four loans, with two of them being paid in a mere five months and three within one year.

4. Consider the emotional aspects of your debts

Before you begin paying off your debts by snowballing them, it’s important to think about the emotional aspect of each. In other words, there may be one or two debts that are causing you to experience more stress or mental anguish than others. For example, you might be worried about having your automobile repossessed. If this is the case, you might give it a higher priority even though that auto loan is ranked third on your list of debts from the smallest to largest.

4. Evaluate other options

Snowballing your debt can be an excellent way to become debt-free. However, don’t kid yourself. If you have a lot of debts, it can be a very long time before you get them all paid off. Faster ways include things such as getting a debt consolidation loan, going for consumer credit counseling, filing for bankruptcy or negotiating debt settlements. Of course, each of these will take some time, as well. Here is a general way to think about these alternatives in terms of how long it would take you to complete each.
Consumer credit counseling Usually 5 years
Debt consolidation loan At least 5 years and possibly as long as 15 or 30, depending on type of loan.
Debt Settlement 2 to 4 years
Bankruptcy 6 months

5. Check out debt settlement

As you can see from the table shown above, the fastest way to become debt-free is to file for bankruptcy. Second is debt settlement. While debt settlement will clearly require more time than filing for bankruptcy, it has an advantage in that it will not have as drastic an effect on your credit score as would a bankruptcy. The second, and quite possibly most important, advantage of debt settlement is that it is the only option that can actually reduce your debts.

In summary

To summarize how you could better manage your debts …
• Analyze all of your debts
• Prioritize them
• Begin paying off your debts using the snowball method
• Consider the emotional aspects of your debts
• Evaluate other options

How To Use A Credit Card Responsibly

Credit cardCredit cards can be useful tools or the devil’s playground – depending on whether or not you use them responsibly. For example, a credit card can help you get a “short term” loan to pay for something where you don’t have the necessary cash in hand. Or, if you use it irresponsibly, it can drag you down into a swamp of debt.

Using credit cards responsibly

The first thing you need to do to use a credit card sensibly is to password protect it. Most credit card issuers do not offer password protection as a standard so you will have to request it. Once you password protect the card, it’s virtually impossible for anyone else (think thief) to use it.

Be sure to sigh the card

There’s a little strip on the back of credit cards where you are to sign your name. Make sure you do this immediately after you receive the card. This is essential should you ever lose the card or have it stolen.

Use it only when you have to

A credit card should be thought of as something you use when you have a sudden emergency or as a kind of cushion of support – and not as something you use to finance a big shopping spree. In fact, you should always try to pay cash for the things you buy.

Monitor your usage

It can be surprisingly easy to miss a credit card payment or to not pay off its balance at the end of the month. Either of these can trigger substantial fees. You really need to keep track of all your payments and be sure to budget enough to pay off your balance when it’s due.

Watch your interest rate

Many credit card issuers will tempt you into signing up for their cards with a low “introductory” interest rate that goes sky-high when that promotional rate expires. Be sure to check out the interest every time you receive a statement to make sure you’re paying what you had agreed to. Also – word of warning – with some cards if you miss a payment or exceed your credit limit, you may be automatically assigned a much higher interest rate.

It’s not free

You must always remember that credit cards are not free. The limit on your credit card does not mean you can spend that amount of money free of charge. Whatever you charge on that card must be paid back in full as well as interest. Your bank might increase your limit to encourage you to spend more but don’t do it. Never spend more than you need to.

Accept just what you need

You may be bombarded with credit card offers but this doesn’t mean you should accept all of them. The more credit cards you have, the tougher it will be to keep track of your payment due dates and your balances. While it might be tempting to charge just a little bit on several different cards, this can be a fast way to trouble. In fact, fewer is better and what’s best of all is to have just one card.

Pay off your balance(s) every month

Probably the most responsible way to use a credit card is to pay off your balance every month. If you were to decide for some reason to make only the minimum payment required, you’ve just started on what could be a slippery slide into debt hell. The credit card companies’ main objective is to keep you in debt. In most cases, that minimum payment will be only enough to cover the interest you’ve been charged and will do nothing to reduce your balance. This means if you were to pay only the minimum due every month, you might literally never get out of debt to that credit card company.

Are Credit Cards Turning You Into A Bad Person?

Young man with had on head looking worriedDo you have credit cards? Almost everyone in America does. I read a report recently that the average American now carries at least six different credit cards. This ubiquitous “plastic” has just about made cash obsolete. Sweden has a national effort going on to make the country completely cashless within the next 20 years. And African merchants commonly accept money through mobile phones by having their buyers transmit a specific amount of money to the merchant’s specific number.

It’s happening here, too

We here in the US are also on the way to a cashless economy. Back in the 1970s, less than 20% of us had a credit card. Today something between 70% and 80% of all adults has at least one. If you are in a situation where you are being forced to pay with cash, it can feel like a real anachronism.

Here’s the problem

When we save money, we move today’s earnings to the future. Conversely, when we use a credit card we yank future earnings into now. But most of us don’t save a lot and are terrible at projecting future earnings. This means we end up spending a lot more than we can pay back very quickly. This makes it easy for many of us to get into trouble with debt.

We’re becoming irresponsible

Cash and coins are more difficult to handle and have a certain “reality” about them. They must be counted, organized, and and delivered to complete a transaction. Each of these actions is an inconvenience or a point of friction. In comparison, a card is only a card. All we have to do is pull it out, swipe it and we’re finished. This makes it very easy to spend whatever we want.

Credit cards can make us forgetful

Counting money is memorable because it takes time and effort. On the other hand, swiping a credit card is fast, easy and can make us forget that were actually dealing with money. As a result, we are less likely to remember details about our purchases and often will go on and buy additional stuff.

They can make us fat

When we are forced to pay for something with cash there is a hidden benefit. It makes it more difficult for us to cave into our indulgences. To put this another way, credit cards tend to weaken our impulse control. I recently read one paper where researchers had found that people using a credit card were more likely to buy unhealthy food products than when they paid cash. And unhealthy food products often lead to weight gains.

Credit card debt can easily get out of control

As noted above, credit cards tend to make us forgetful. This makes it easy to end up with big balances without even realizing what’s happening. If you’re not careful, you could run up balances so huge you would not be able to pay them off within 30 days. Once this happens and you began carrying balances forward, it’s easy to fall into debt hell because of the high interest you’ll be charged.

Most credit cards today have interest rates as high as 20% or even higher. As these interest rates are added to your balance month after month, it can get to the point where you will be able to make only the minimum payments and would never be able to get out of debt. There was an example I saw recently where if you owed $10,000 at 18% and made only the minimum payment of $150 each month, you would literally never get out of debt. And if you paid $200 a month, it would take you a bit over seven years to pay off that $10,000.

Are you a bad person?

Have credit cards turned you to a bad person? Have you become irresponsible in your spending habits, forgetful or even fat? If this is the case, you need to change your spending habits, begin saving money and use your credit cards more wisely. That way, you could turn back into a good person and get control of your finances and financial future.