Debt Management Program: 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.

Continue Reading: More of Credit Counseling Service: Credit Card and "Quick Money" Don'ts