Sunday, March 25, 2012

Managing Credit

        Not all debt is bad. That’s fine to have one, as long as you are careful about why and when you take out loans. You have to determine if it’s good or bad debt. Good debt is money you borrow to finance an asset. An asset is something that has value today and is expected to rise in value over time, such as mortgage where the value of your real estate will appreciate in value and turn out to have been a good investment. On the other hand, bad debt is any money you borrow that is not used to finance an asset, like card debt to pay for spa treatments, dinners out, the latest shoes or handbags. So, too, is a car loan. Your car’s value never rises.

        Credit card debt is the ultimate bad debt. Credit cards are major area of stress for us. No doubt, it feels good to buy new things without getting money from your wallets. Then the monthly bill comes and remorse sets in. You have no idea that you charged that much, and you don’t have the money in your savings to pay off the entire balance at the end of the day.

        Credit card companies make money when you can’t pay off your entire bill in full. How we handle our credit cards and our debt payments is considered a great window into seeing how financially responsible we are. As defined by Suze Orman, a New York Times bestselling author, “responsibility is keeping your regular monthly charges limited to what you can pay off in full when the bill arrives.” The only charges you should allow yourself to make that you won’t be able to pay off are for true emergencies that you can’t cover out of your savings account.

        With the exception of your mortgage and few other kinds of “good” debt, if you can’t pay off everything you owe, you’re most likely in trouble with debt. But debt is habit-forming. Before you know it, you owe more than you can comfortably handle.

        For you to build a fabulous individual financial profile, once you have the card, we have to use it at least once a month and pay the entire bill on time every month. Make sure you have a credit card for yourself and only yourself. You are never to let anyone else use that card. There are a lot of card shopping tips, which are helpful:

  •         Don’t pay an annual fee. Your best bet is to get a card that is 100% free.
  •        Make sure there is at least a 3-week grace period. The grace period is     the time between the end of your monthly billing cycle and when your payment is due. If you pay your bill in full on time, you will owe no interest. If you don’t have a grace period, the card company can start charging you interest from the day you make a purchase, even if you do not have a prior month’s balance.
  •       Aim for a low interest rate. Look for the card with the lowest interest rate and pay attention to the fine print. Often card companies will offer a great introductory rate for a few months, but then normal rate is boosted to 18% or more. Ideally, your permanent rate should be 10% or less.

       It is absolutely essential that you pay more than the minimum amount required each month if you want to get out of debt in a timely and cost-effective manner. If your credit card debt is spiraling out of control, you should take a pair of scissors and cut it up, but do not cancel your credit card, it can hurt your credit score.

       But be sure not to avoid your debt. Here’s what you will do. Make a list of all the amounts of money you owe, starting not with the largest amount but with the balance on which you pay the highest interest rate. Then list your balances in descending order, by interest rate. Figure out the largest possible amount you can afford to pay each month toward all your credit card.

       For me, I had about three (3) credit cards then. But in two years' time, I fully settled all of them. What I did was to refinance the total balance of all the cards from a loan in a savings and loan association with a lower interest rate. But prior to that, if I have extra money I had to pay my credit card debt so that interest will not exact me much.

        On the other hand, a debit card is not a credit card. It is a transaction where you make a purchase using your bank ATM card, the amount of the purchase is instantly deducted (debited) from your account balance. It is important to understand that purchases you make with a debit card are not reported to the credit bureaus.

        I have found that people with large amounts of debt often avoid looking at themselves and their debt. Sometimes they are people who have problems with impulse control. When they see an item they want, they just have to have it, without regard to whether they need it or can afford it. People who grew up without much money and later earn a comfortable living sometimes spend too much to make up for what they didn’t get as children.

No comments:

Post a Comment