May 8, 2008

Handling Credit Responsibly

Credit cards are a useful financial tool when used wisely. But credit card debt can become a weapon against healthy finances if you let it sneak up on you.

News reports left and right talk about the doomsday economic forecast and the potential impact on our own pocketbooks. The national debt is at the highest ever in history, and that means our individual debt is equally outrageous. The average adult in America owes anywhere from $10,000 to $14,000 in credit card debt. Millions of dollars in finances charges are paid each year. Meanwhile, people sail along in their sinking ships unaware of the financial crisis ahead.

Credit cards are not manufactured with built-in sensors that alert you to dangerous decisions. In fact, the reality is quite to the contrary. With a cultural impulse towards frenzied spending and a “pay it back later” mentality, there’s no mystery to debt. For years the American people have been ramping up for a short trip into a brick wall.

You’d think we’d know better than to spend more than we can afford to pay back. But when times get tough, or you really want that vacation, or when there’s a great sale on fantastic shoes, this logic flies out the window. Even colleges and universities are promoting the use of credit cards. Credit card companies will provide kickbacks to participating learning institutions that encourage their students to use credit. We should all be taking classes in how to avoid building debt altogether.

The good news is that there are ways to keep your debt from climbing over your head. Handling credit cards and other credit situations responsibly requires self-control and a reality check. Certain debt can help build a good credit reputation that will help you later, for example to get a home loan. Other debt is much like empty calories, a waste of time and energy.

Don’t view your balance limits the same way you view speed limits. They are not something you want to quickly meet or exceed. Most credit cards give extreme credit lines to fresh customers, such as students in college or singles, with good credit ratings. A clean slate is perfect bait for the big credit card companies. Many first-time credit holders take this newfound freedom and run with it. Before they know it, the credit line is packed and the minimum payment is big and taxing. Then that nice introductory rate expires. Now they have to open another line of credit just to make ends meet, and another, and another…

Take a clear look at your spending. Look at where the money is going and don’t slap down the plastic without thinking. Cut back on what you don’t need, which may be more than you suspect. Most people, unless in a state of financial duress, don’t bother to pay attention to what they buy. Often once people examine how much they are dropping on things they don’t need, it’s a real wake up call.

If there is something expensive on your wish list, save you money in order to buy it. This will not only place more personal value and appreciation on the item, it will prevent you from having to involve your credit card at all (and the temptation to use it without paying it back). Avoid using credit cards to pay for meals and short-term expenses; remember there is, or will be, and interest rate.

Use only what you can pay back in a limited and reasonable amount of time. Be honest with yourself about your income, and take a step back to analyze your expenses. Many of our expenses slip out of notice when we think about our monthly budget. And no one really likes to sit down and calculate where all of their money is going, except for in a purse or wallet. It would be much more fun to just splurge on the new big screen “just this once” or spend the afternoon in retail therapy.

These little excuses and the simple belief in the “God-given right” to have what we want makes up the American way. Unfortunately, the American way is to accumulate debt and large houses we can’t afford, filling them with more than we could ever need. Instead, be smart and choose to make wise decisions that protect your financial future.

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May 3, 2008