Some Credit Card Do's

They say you can learn by experience. Many of us have plenty of experience using credit cards. Heidi used to have a thick stack of credit cards. “Plastic Power” was path to purchasing points and peer prestige in those days. These days, credit cards have become a minefield of conflicting rules and new regulations. What has not changed is this: effective use of credit cards is the only way to gain benefit from them. Here are a few tips:

 Avoid paying interest and fees

               "Low" monthly installment plans are designed to make you feel comfortable and make your creditors rich. It is easy to convince yourself, "Somehow, I will be able to afford the minimum monthly payment." This is dangerous. Instead, make sure that the minimum payment is easy for you and that you will make much larger payments every month in order to avoid paying tons of interest.

We cannot tell you often enough: If you cannot pay the entire balance, at least pay more than the minimum payment required. Smaller payments now cost more later in deeper and longer debt. It just does not make sense to pay the "minimum" payment. Minimum payments add years and thousands of dollars in interest payments. That is because the interest keeps accruing—and the interest on the interest keeps accruing. The Money Machine has carefully designed the credit card system to keep you in debt for as long as possible.

               Credit cards also are designed to consume your money by charging late-payment fees and over-the-limit fees. On some credit cards, if you pay just one day late, you could be charged a late fee. In addition, the credit card company also could increase your interest rate. Over-the-limit-fees can be charged to your account if you spend just one penny past your credit card limit.

Do not take on more credit

Credit card companies are very aware when you start paying off your cards. It affects their bottom line because now they will not be able to count on you giving them all those interest payments. They want you back into debt. Creditors may start offering you more credit or a higher spending limits, but do not fall for it! 

Refuse these offers or you will be pulled down into out-of-control credit again. If they offer you a higher credit limit, refuse it. If they give you credit card checks, shred them. If they send you more credit cards, cut them up.

Make a plan to pay down your debt

               Wipe your debt column clean. You can do this slowly, but firmly. There are several theories about what is the best way to do this. Decide on the way that makes the most sense for your own situation. Make it a simple process that you can follow. The main thing is to take portions of your outstanding debts and pay down as much as you can every month.

               Here first thing you have to do is make a master chart of all of your debts, who you owe, how much you owe, the minimum monthly payment, the interest rate, the remaining payments. Add up all the minimum monthly payments. This is your "total minimum monthly payment." 

One pay-down strategy goes like this: Take the amount of your “total minimum monthly payment.” Promise yourself that you will pay this amount toward your debts every month. Do not incur any new debt and keep paying that amount until all of your debts are paid down. That way, your budget can remain stable.

Now, decide which debts to pay off first. Some people suggest paying down credit cards with the highest interest rate first. When those cards are paid off, start paying down on the cards with the next highest interest rate.

The key is to a. Keep paying the same amount toward your credit cards until all of the cards are paid off, and b. don’t incur any new debt.

Consider using some of your savings to pay down credit cards with high interest. If your savings account is earning only half the interest that you are paying for credit cards, this is better use of your money. The key is to: 1) build your savings account back up and, 2) don't use your credit card after it is paid off.

               Plan a little reward for yourself when each card is paid down. Then start paying down the next card. When all the cards have a zero balance, celebrate. Promise not to use your credit cards except for an occasional purchase to keep them active. Keep your promise.

Now you can have an emergency supply of funds available—for true emergencies—with none of the hassles and costly fees. This is allows for the most efficient use of your credit cards at the greatest benefit

Heidi Clingen is a long-time resident of Stevenson Ranch. She and Samuel K. Freshman are authors of The Smartest Way™ to Save, Why You Can’t Hang on to Money and What to Do About It. They offer only their opinion, which does not constitute professional, financial, or legal advice. To receive a copy of The Principles of Financial Independence or submit questions, email them at Heidi@TheSmartestWay.com.