A long time ago - when I was graduating from college, even before I actually started my first job - I was sent applications for credit cards. They were very easy to get. They still are. Young folks getting their first jobs are introduced to the world of credit cards. Credit cards are a modern necessity but for some they become a serious problem . Credit card debt can destroy young people's lives.
This section is for people getting started in the credit world.
If you want to become a homeowner you need to have credit cards work for you. It is OK to get credit cards. It is OK to use them. The purpose in using them should be to establish a credit history. What is not OK is carrying any sizable credit card debt.
Let's say that you want to buy a new TV for $700. Do not do it unless you have the $700 set aside for the purchase. If you are not the best in the self-control department, perform this drill:
buy the TV on your credit card only when you have the money in your checking account. When you leave the store (OK you can take the TV home first but you can't plug it in yet) write a check to the credit card company for the amount that was billed.
Go home, take the TV out of the box, plug it in and Scotch tape the envelope with the check to the top of the TV. Mail it (the check not the TV) to them when you receive the credit card statement. You will have accomplished two things:
1) established credit usage and
2) not run up any debt.
Obey the following rules when using credit cards:
- use them infrequently
- do not buy anything that you do not have the money in hand to pay for
- pay off all of your credit card debt when you receive the statements.
At present, I use credit cards only when
1) shopping online
2) buying "big ticket" stuff because BofA gives me 1% back and I pay the bill immediately
3) in an emergency.
It is only in the last few years that I have broken down and used them to pay for gasoline. It is a lot easier to stick the card in the pump than to deal with the attendants at gas stations. It is a strange comment on American culture that in the '60's the people at gas stations charge thirty something cents a gallon, gave you Blue Chip trading stamps, checked your oil and washed your windshield. Now they sit behind bulletproof windows, charge you $2.50-$3.00 a gallon and act like you are nuts when you ask where the freaking squeegee is.
If you want a DVD and do not have the cash then you cannot afford it. Wait until you have the cash and pay cash for it.
If you feel that you need to get away for the weekend and do not have the money - stay home and watch TV. Watch cartoons on Saturday and football on Sunday.
Don't go to restaurants and put it on your credit card - pay cash. If you don't have that kind of cash - eat at McDonalds. If you cannot afford that then you really are in trouble.
Have some understanding with your spouse about that what will be spent for birthdays and the anniversary will be limited to cash-on-hand. Mutually agree that you love each other but that your love would be enhanced if you could buy your own house some day. If you are not married then be grateful that you do not have this problem.
Avoid getting a lot of credit cards. When the kindly woman at the cash register at Macy's asks you if you want to apply for a credit card and tells you that you will get 5% off whatever you buy that day - resist. She is working for Satan. She represents the forces of evil even though she looks innocent. She is out to destroy your credit. She probably owns apartment buildings and wants to make sure that you become a permanent renter.
Do not succumb to the concept that we live in a "credit card economy" and that using credit cards helps the economy. I suppose that in the 1970's people bought cocaine and cocaine dealers made money and that gave the economy a boost. In the long run neither drugs nor credit card debt really helps the economy. Those who are ruined by them become economically marginalized.
There is a point to make here which is important. If you suddenly see your need to maintain credit cards balances when you formerly did not and this is not the result of an emergency the underlying problem is probably that your income went down or expenses went up and you had no savings to make up the shortfall. In a real sense the problem with credit cards is that the are often used by folks with no savings. In general, we would all do well to save more. (For the shopping crazed "save" here means "put money in a savings account" not "buy while stuff is on sale.")
The Credit Industry
If you look on-line you will see that there are thousands of listings for credit cards, debt consolidation, credit repair, debt counseling and bankruptcy. The credit card industry has spawned other new industries.
What Should You Put on Your Credit Cards?
On-line shopping, emergencies: tow trucks, bail. Use them also as a "deposit" when traveling. You need them to make hotel reservations and to rent a car.
The Plastic House
In the past few years we have seen a mutant form of the plastic monster. It is the 125% LTV mortgage. The proposition is simple enough - pay off all of your credit cards by getting a second mortgage on your home. The interest is probably less that you are now paying and it may be tax deductible.
These are ill-advised. The wrong people get them. People who have problems meeting their credit card debt now tie this debt to their home and can charge more stuff.
Let me draw an analogy. Around the year 1900 the German pharmaceutical firm Bayer (the aspirin people) marketed a cure for morphine addiction. This wonderful product was sold under the trademark"heroin". The 125% LTV loan may likely do to your finances what heroin does for your body. Seems like a good idea at the time - feels good at first but it's nasty and hard to get rid of. It is no more a cure for credit card debt than heroin was for morphine addiction.
If you are in this credit card abyss you need to work very hard to get out of it. You need to stop charging and seriously do all that you can to maximize your income. You need to pay off the credit cards with the highest rates first. If you work overtime or get a second job do not reward yourself for it. You have already spent the money that you are working so hard for. If your debts are so large that you cannot possible pay them off with a 3-year austerity program you need to consider a bankruptcy. This will have a negative effect on you creditworthiness for years to come but you may be able to regain control of your life and do away with the hideous effects of being a captive of the P-Monster.
If you decide to get a "cash out" refinancing or a second mortgage to pay off existing credit card debt you must do yourself the favor of seriously reducing the balances. Do not close the accounts. That can have an adverse effect on your credit score.
Living With Plastic
Credit cards are a necessity. Get them. Use them wisely. Make them work for you by enhancing your credit history. Don't charge anything that you do not have the cash to pay for. Pay all credit card debt off immediately unless there is an emergency.
Not Just Plastic - Other Credit
I have seen many young people who could not qualify for a home loan because they had two car loans. If you cannot afford to pay cash for a car, keep the payment low. As a rough guide, if more that 15% of your gross income is spoken for by debt you may not qualify for a home loan.
There is "smart" debt. If you take out student loans and get through medical school that is smart debt. If you buy a car which you need to get to work or use for work that is smart debt.
For the More Sophisticated
Please understand that most (maybe all) of the advice above is for beginners. Folks who have well-established credit may seen the picture differently. They may "put everything" on credit cards for the purpose of accounting or to get some subsidiary benefit such as airline miles or cash. If your approach to credit is that sophisticated, feel free to pass this along to people who need it.
Dick Lepre
There MIGHT be a lot less credit-card misuse and addiction if the card vendors were required to disclose at the time of solititation and in the payment-due statements the TIME and TOTAL COST that the user is likely to incurr if the make the minium payments.
Actually, it's worse: Even if an account holder calls up and says "Could you tell me at the current interest rate I'm paying, if I charge nothing more on my card, how long it will take me to pay this down and how much interest I will have paid" they will not be given this information.
There are calculators online such as --
http://www.dinkytown.net/java/DebtRolldown.html
-- which WILL crank out the shocking truth. But the folks who most need to see those numbers either don't go there or go there too late.
My two cents.
Posted by: Alex Censor | December 15, 2006 at 02:09 PM