Credit Card and "Quick Money" Don'ts

Knowing how to manage your credit is important. That includes not only what you should do to keep yourself on track, but also what you shouldn't do. If you don't follow these rules you just may be looking for a Christian credit counselor to help you with a debt management program.

Here is the credit counseling service list of credit card and quick money "don'ts":

1. Don't get stuck with negative interest!
   Compound interest can be your friend, think monthly interest deposits, or it can be your worst enemy, think 32% annual interest rate on a credit card. The only positive interest is interest you earn. If you put money into an interest bearing savings account, you will make your money work for you. On the other hand, if you carry a credit card that charges high interest, you're working just to keep up with payments, and giving away your hard earned after tax money. Worse yet, it is money you pay for money you've already borrowed, be it from a credit card, your mortgage, or a loan against the value of your house. So, for example, if you pay for your grocery shopping with a credit card, and don't pay the bill in full at the end of the month, you end up paying for your groceries for months, or years. Yikes. I am going to call this negative interest.

    

2. Negative interest, mortgages, and home equity loans.
   One way in which you can accrue negative compound interest is through home mortgages and equity loans. People often think, mistakenly, that having mortgage interest is good because it can be written off as a tax deduction. In fact, some people think that they have to have a mortgage because they believe the tax deduction is significant. Homeowners will borrow against their mortgage by getting a home equity loan (HEL) to make an expensive purchase, such as a car, and then justify it as a tax deduction. In any of these cases, the numbers don't add up to make the deduction worthwhile. Think about it this way: you spent $1.00 in interest to get .30 cents back from the government. If you didn't spend that dollar, you'd have it instead of the thirty cents. The fact is, you should almost never have a mortgage for tax purposes. If you must carry debt, a mortgage is often the best kind, but if you borrow against that mortgage with a home equity loan, you must also realize that you're putting your home at risk as collateral. Sometimes, it makes sense to take equity out of your home, but a tax write-off is a financially unsound reason. I've seen people borrowing up to 120% over the value of their home, only to find out it may not all be deductible.
   
   Regardless of your reason for taking out a mortgage, avoid those that bring a high interest rate with no money down. You should also avoid all forty-year, and, if possible, thirty-year mortgages, all you’re paying is interest. Be very careful with adjustable rate mortgages, the lenders make these attractive to protect themselves, no one knows what interest rates will do and if your mortgage adjusts several points this can make the payment unmanageable.

    

3. Negative interest and credit card debt.
   Another important way you can accrue negative compound interest is through credit card debt. Once you get into substantial credit card debt, it's almost impossible to get out. Unfortunately for some, each of us has a different debt tolerance — the amount of debt you can carry without thinking it's too much. One sixty-two year old man I counseled had $20,000 in debt at an average 20% APY. Though he worked part-time and received Social Security, he did not make enough to pay more than the minimum each month. In addition, he didn't own his own home, and therefore had no equity against which he could borrow to pay down his credit card debt. For the rest of his life, he'll have debt. To make things worse he had no idea that he was negative $350 a month in his budget before making any credit card payments. He was using them for gas, groceries, and other essentials. He asked me, "How did this happen?" It's very easy, which is why it's so dangerous. Even if you're not bothered by your own credit card debt, the fact is, it's a very expensive form of d/ebt to carry. Don't be fooled by no interest or a low interest rate for a few months, don't fall for rewards programs and spend more, take control of your credit cards and get positive interest not negative. If you’re in trouble please call a consumer credit counseling service, and speak with a certified Christian credit counselor who is an expert in credit card debt and can help.

    

4. Negative interest and "payday" loans.
   Perhaps the most despicable form of usury is the payday loan, signature loan, or installment loan. These are short-term loans that are often marketed as paycheck advances, except the loans carry an extremely high interest rate. Imagine taking out a $600 loan, thinking you'll pay it back the next week when you get your paycheck. That's what one of my clients thought when she borrowed the money to make child support payments. But a miscalculation on her overtime, and a subsequent back injury sunk her deeper and deeper in debt. She rolled over the loans, borrowed more money, and failed to make payments beyond the minimum interest required. When it was all over, she paid more than six times the amount of her original $600 loan.
   
   Many people blame the borrower for not realizing that payday lenders charge exorbitant interest rates, while other blame the lenders for offering easy money that is often too difficult to pay back and advertising these as a "quick fix". After all, such lenders make billions of dollars every year, while good hard working people like the client I spoke of go broke. My advice: Don't go near payday loans! And don't even think about Internet payday loans. These lenders will wire you money, but there is almost always no contact information for the company — no telephone number or postal mail address. If, like my client did, you seek consumer credit counseling, it's often no easier for the Christian credit counselor to locate these companies in order to negotiate loan repayments. The goal of the payday lender is to keep you in debt and make them money. The longer you owe them, the more money they make.
   
   Unless you have a well thought out strategy for living without your paycheck, which is what you'd have to do when you take out a payday loan, you should consider how much you really need the money. What's going to change two weeks from now, if you can't pay the money back this week? How will you ever get caught up? People fall behind on payments because the interest is so high, so it's better to avoid such loans entirely. Remember nothing will change next week, you won't have the money and will roll the loan into another one and end up broke or in a debt management program.

    

5. Don't open multiple department store credit lines.
   Call any consumer credit counseling service and speak with a Christian credit counselor and they should tell you opening several credit card accounts might seem like a good idea, but it's not. That free t-shirt, or 10% one day discount you get when you open a store account really only encourages you to spend more. Not only that, but a spate of new department store accounts could actually hurt your credit. It doesn't look good to the credit bureau when you seek multiple new sources of credit. Moreover, department store interest rates are typically high — often 21%. I realize many stores offer promotions, coupons, special sales, etc. for their card holders they do this for a reason, it gets you to buy more. If you have a merchant that you are very loyal towards and insist on opening or keeping a card, always pay it in full and don't spend money you would not because of their promotions or sales.

    

6. Don't use credit cards for consumables.
   A sixty-two year old man came to me with $20,000 in credit card debt. A significant portion of that debt was due to consumables. He'll be paying for things (e.g., gasoline, groceries) long after they've disappeared. Don't ever use a credit card for a purchase that will be gone by the time the bill comes. If the item isn't going to still be here in a month, it's not worth putting it on your card, because you'll be paying on it for months after it's gone.
   
   Don't use your credit card unless it's a points card (i.e., a card that earns small amounts of cash back, or points toward frequent flier miles, and the like), and you will pay off your card at the end of the month. Charging on a credit card is like not spending real money. I have seen study after study showing if you use plastic you spend more than if you used cash or a check. The lenders and merchants have seen the same studies so don't fall for it. If you are not among the handful of consumers who can control their spending and never charge more then you can pay in that month, keep your card in your pocket when you hit the register.

    

7. Don't incur late fees.
   It's a simple piece of advice: pay your bills on time so you don't incur late fees. They're simply a waste of your hard-earned money. Just as important, late fees reflect negatively on your credit. If you do not utilize online bill paying services or make payments on your creditor’s website now is the time to start. This will save you time, and money (checks, stamps,) and you will not have to worry about the mail.

    

8. Don't make purchase decisions based on the minimum payment.
   I once met with a young man who was past due on several credit cards. When I reviewed his accounts I noticed he purchased a brand new TV for $500 while several of his cards were past due. When I asked his reasoning he said he figured the minimum payment would only go up by about $10 a month and he can always come up with that. When you make only the minimum payment every month, all you are doing is paying off the interest and maybe a little bit of the principle. This type of thinking is one reason so many of us need debt help today. If you do not want to seek out a Christian credit counselor to arrange a debt management program then forget about the minimum payment all together and pay those credit cards off.

    

9. Don't take cash advances on credit cards.
   Cash advances usually come at a higher interest rate than debt from purchases, and often come with a transaction fee as well. Moreover, if you've already got debt on the same card, payments are typically applied to purchases first, thereby leaving the higher interest from the cash advance to accumulate. Unfortunately, you can't tell your credit card company how to apply your payment. Most often, payments are made in this order: fees, minimum payment, interest, purchases, and finally, cash advances.
   
   Cash advances aren't payday loans, but they're still very costly, and you should use the same cautious thinking here as for payday loans. What's so important that you have to have this money now? It's typically not the most desperate people who get into the most with credit cards, because banks (unlike payday lenders) don't loan offer credit cards to high risk applicants. It's the middle class Americans who get into the most trouble with credit cards and cash advances.

    

10. Don’t impulse buy.
    Lots of people do it, and merchants know this! They spend a lot of time and money figuring out the best way to lay out a store, and just the right words in advertising so that you will be encouraged to buy things you don't need and, often, won't want soon after buying them.
    
    If you think, or know, that you're an impulse buyer, take the appropriate steps to prevent this detrimental habit. Leave your credit cards at home, or have someone hold them for you. If you are a particularly bad offender, put your credit cards in a glass of water, and then freeze them. When you're out shopping, only buy the specific items you need. If you see something else and grab it without thinking, stop! Put it back, and give yourself five days. If you still want it after five days, buy it. Most likely, you won't even remember what it was that caught your eye to begin with — and that's money saved. I challenge you to look around your house right now and if every item had the dollars paid for them sitting next to them would you still want the item? Remember all these expenses add up.

     

11. Don’t use your debit card as another credit card.
    Studies show that when you use plastic, you spend more. It doesn't matter if that plastic is a credit or debit card. This can be dangerous, as it doesn't take much to empty your bank account, leaving you nothing for living costs. At the same time, however, plastic is the direction we're heading for our purchase transactions. So, understand that whether it's an ATM or credit card (even cash!), it's your money that's going into someone else's hands. With your debit card you could be held responsible for up to $500 in fraudulent spending where that is generally limited to $50 with a credit card. With your debit card any unauthorized debit transactions can take several days for the money to be replaced which would be a major problem for most of us. Also hotels, car rental agencies, gas stations, and others often place a float or hold on transactions for the amount they think you will spend. This hold may not be removed for several days even if you pay with cash in the end.

     

12. Don't be desperate!
    People get into debt for many reasons. An individual who spends when unhappy, happy, or simply out of habit, begins to form spending-associated psychological problems. At Family Credit Management Services we receive two to three thousand unique calls a month from families going through first-time debt troubles. We speak to these families every day and know financial problems can seem overwhelming and insurmountable, especially when a family member hides his or her financial plight from a spouse. This situation is becoming more and more common, and more upsetting to individual who now fears telling their spouse. Be sure to discuss your financial arrangements with your spouse and share the burden so that no one is alone, and no one is left out.
    
    If you need debt help, contact a Christian credit counselor at a state licensed consumer credit counseling service, investigate your options, talk about ways to handle debt, credit, and if necessary a debt management program.