Recently, someone wrote to me and said "Charles, the advice you give is on point, but you can't say that all credit card use is bad. There is such thing as responsible credit card use. "
Yes, I will concede that it exists. I touched upon it in our Credit Cards and Kool-Aid article, but I didn’t go in depth to show where it actually is responsible to use a credit card. Each of these suggestions should be followed on the whole and with consistency, else it is not responsible credit card use. Hopefully, you won’t need to ever use a credit card, I can understand if it comes to that.
To stay consistent, let me open by saying that I did open a credit card account about a year ago, two actually, and carried a balance up until now. Officially, at the end of this month, I will have them all paid off in full, 2 months ahead of target. Many will tell you that was way too slow and I agree. Thank you, Lord. Thank you, Dave Ramsey. And thank you, Internet.
So step 3—elimination of negative debt is presented below. "Negative" debt, of course, is debt owed on a possession that is consistent or declining in value (like a car). Positive debt goes up in value (like a home), but should still be eliminated as quickly as you can.
1a. Don’t Carry Balances. Ever.
There are those of you out there that are convinced that credit cards should be used as long as you can pay of the balance in full so that you can build up your credit. I concede that this may be a good option, but it’s not the best—somewhere along the line, you’ll fall in if you don’t have a significant back up source (read: cash). As a college student, you should avoid credit cards but I can understand if you don’t choose to—but don’t get into the "i'll pay it when I graduate" mentality if you are not aggressively committed to doing so. However, those of you using credit cards "just in case of an emergency" are setting yourselves up for failure. This is the fastest way to set up a revolving balance, which brings in interest and finance charges that will entrap you if you don’t know what you’re doing.
1b. But if You Do…Set a Definite Payoff Goal
I graduated and came to New York in June 2005 with a balance of 2,200 in credit card debt after I left school. Luckily, I had no school loans. My goal was to eliminate all of my credit debt "as soon as possible" and made $100/month (the minimum payment was $20.) However, that’s not a specific goal. Setting a specific goal (of say 8-12 months) forces you to make the proper payments upfront and you can eliminate debt faster. Once I set up a payoff day of April1, 2006 I could then back track to determine how much to pay off and when. Things are still looking to be on track there.
2. If Your Emergency Fund is funded, eliminate the Card...
But don’t close the account. Just stop using the card. The number one reason people say they keep a credit card is because of emergencies. But once you’ve built three to six months’ worth of emergency expenses in a high-interest savings account, why use the card? Keeping the account open can help improve your credit score, and because you no longer have the cards, you won’t lose the temptation to use it again. However, if you've already bought a home and have a car with good insurance, a credit report is not all that necessary to care about, becuase you'll no longer need to borrow. And we know who borrowers are slaves to, right?
3. No one gets rich from "Rewards" Cards
Seriously. Ask Bill Gates, Warren Buffet, or your local liquid millionaire. Ask them if they use those rewards cards much. You be pretty surprised at the answers. You’d have to spend more the get more rewards/miles/cash back. Sometimes they advertise this as "the more you buy, the more you save!" Credit users spend 12-18% more than credit and debit users. Keep that in mind. What could you do with 12-18% more money per year?
4. Work on Those Student Loans
I cannot speak from experience, but I do think its important to pay off those student loans in the same way as you would your credit loans. My girlfriend has taken on 4,000 in graduate student loan debt and will begin paying in 2008. The payments will be about $60/month, which is asking for trouble. If you make significant income (over 50,000), try to pay off your debt within 2 years. This will eliminate drags on your returns form investments, which we shall cover later. $60 a month will not get you there. Eliminate the debt so that you can put that money towards better uses as your income rises.
5. Lastly, Remember your Income will Not Save You
The general consensus is that if left unchecked, income will always rise to meet expenses. It’s human nature. We get a raise at work, we think of ways to spend that raise. However, many fail to realize that their pay raise often translates to less than what they think. Few people think "I got a raise, so that’s more money I can save." I talk to my friends here in the City and I guarantee you saving is the last thing on their minds. And why shouldn’t it be? The City has many places who want your money, and your bank account is perhaps the last spot for it.
Yes, I will concede that it exists. I touched upon it in our Credit Cards and Kool-Aid article, but I didn’t go in depth to show where it actually is responsible to use a credit card. Each of these suggestions should be followed on the whole and with consistency, else it is not responsible credit card use. Hopefully, you won’t need to ever use a credit card, I can understand if it comes to that.
To stay consistent, let me open by saying that I did open a credit card account about a year ago, two actually, and carried a balance up until now. Officially, at the end of this month, I will have them all paid off in full, 2 months ahead of target. Many will tell you that was way too slow and I agree. Thank you, Lord. Thank you, Dave Ramsey. And thank you, Internet.
So step 3—elimination of negative debt is presented below. "Negative" debt, of course, is debt owed on a possession that is consistent or declining in value (like a car). Positive debt goes up in value (like a home), but should still be eliminated as quickly as you can.
1a. Don’t Carry Balances. Ever.
There are those of you out there that are convinced that credit cards should be used as long as you can pay of the balance in full so that you can build up your credit. I concede that this may be a good option, but it’s not the best—somewhere along the line, you’ll fall in if you don’t have a significant back up source (read: cash). As a college student, you should avoid credit cards but I can understand if you don’t choose to—but don’t get into the "i'll pay it when I graduate" mentality if you are not aggressively committed to doing so. However, those of you using credit cards "just in case of an emergency" are setting yourselves up for failure. This is the fastest way to set up a revolving balance, which brings in interest and finance charges that will entrap you if you don’t know what you’re doing.
1b. But if You Do…Set a Definite Payoff Goal
I graduated and came to New York in June 2005 with a balance of 2,200 in credit card debt after I left school. Luckily, I had no school loans. My goal was to eliminate all of my credit debt "as soon as possible" and made $100/month (the minimum payment was $20.) However, that’s not a specific goal. Setting a specific goal (of say 8-12 months) forces you to make the proper payments upfront and you can eliminate debt faster. Once I set up a payoff day of April1, 2006 I could then back track to determine how much to pay off and when. Things are still looking to be on track there.
2. If Your Emergency Fund is funded, eliminate the Card...
But don’t close the account. Just stop using the card. The number one reason people say they keep a credit card is because of emergencies. But once you’ve built three to six months’ worth of emergency expenses in a high-interest savings account, why use the card? Keeping the account open can help improve your credit score, and because you no longer have the cards, you won’t lose the temptation to use it again. However, if you've already bought a home and have a car with good insurance, a credit report is not all that necessary to care about, becuase you'll no longer need to borrow. And we know who borrowers are slaves to, right?
3. No one gets rich from "Rewards" Cards
Seriously. Ask Bill Gates, Warren Buffet, or your local liquid millionaire. Ask them if they use those rewards cards much. You be pretty surprised at the answers. You’d have to spend more the get more rewards/miles/cash back. Sometimes they advertise this as "the more you buy, the more you save!" Credit users spend 12-18% more than credit and debit users. Keep that in mind. What could you do with 12-18% more money per year?
4. Work on Those Student Loans
I cannot speak from experience, but I do think its important to pay off those student loans in the same way as you would your credit loans. My girlfriend has taken on 4,000 in graduate student loan debt and will begin paying in 2008. The payments will be about $60/month, which is asking for trouble. If you make significant income (over 50,000), try to pay off your debt within 2 years. This will eliminate drags on your returns form investments, which we shall cover later. $60 a month will not get you there. Eliminate the debt so that you can put that money towards better uses as your income rises.
5. Lastly, Remember your Income will Not Save You
The general consensus is that if left unchecked, income will always rise to meet expenses. It’s human nature. We get a raise at work, we think of ways to spend that raise. However, many fail to realize that their pay raise often translates to less than what they think. Few people think "I got a raise, so that’s more money I can save." I talk to my friends here in the City and I guarantee you saving is the last thing on their minds. And why shouldn’t it be? The City has many places who want your money, and your bank account is perhaps the last spot for it.
Bottom line, you have to discipline yourself. Your income won’t do it. Sure you worked hard for your money, and you deserve to spend. But understand that even millionaires follow written spending plans. It’s a responsibility that income will not eliminate, no matter how much you make.
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2 comments:
Thanks for spreading the word about people needing to deep-six their debt and connect with their cash, buddy. Dave's plan makes a lot of sense, doesn't it? Way to go, baby! www.debtective.com
Your tips are really good! Well-done! Almost everyone has debts. Therefore, this post is useful. Fortunately, I am debt free, but I will take your steps into account.
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