| How to Divorce Your Credit Card Jan 2nd 2013, 16:00 While a wisely used credit card can be an asset, a poorly managed one can be toxic. Divorcing yourself from your credit card for all but the most essential purchases is one way to rein in bad spending habits, and learning to pay cash again for most things will bring back a sense of value into your shopping choices. But like any breakup, the process may be painful and there may be moments of temptation to return to spend-as-you-like. Finding a simple route to ridding yourself of credit debt will help you to live more freely, within your means. Assessing your current credit use - Scrutinize your credit card bill to determine what you're spending money on each month. Sometimes you may not even realize how much you're charging until you see it in black and white. Plus, because credit card fraud has become commonplace, you may be paying for items you haven't even purchased. (You have been checking monthly, haven't you? If not, goodness knows whose boots, restaurant meals and movie tickets you've been funding!)
- Look for a consistent pattern each month. Compare and contrast three months worth of credit card bills to look for trends. For example, are you purchasing a $5.50 latte and $3.00 scone every morning? How often do you shop or dine out and then use your credit card?
- Add up your monthly credit card expenses, along with other financial obligations such as mortgage payments, utilities and groceries. Identify every bill that must be paid each month in addition to your credit card bill. Don't forget about childcare, school tuition and gas (if you don't pay for gas using your credit card).
- Compare your monthly expenses to your total household income. Are you spending more money than you bring home each month and if so, where is the bulk of it going? Typically, the largest amount should go toward the mortgage or rent, so concentrate what is being spent on luxury items such as clothing, entertainment and dining out.
- Find luxury items you can do without. Tally up the consistent expense and reduce it from the total. Compare your new total to your household income and determine if you are living within your means. If you still are not, go back through your list and cut other expenses. While most people consider cable television to be in the "need" instead of "want" pile, you should consider transferring it to the "want" pile until you can get your credit cards under control.
- Identify how much money you're sending to your credit card company each month. If it's the minimum balance, there's a good chance you'll end up paying double for your purchases in the long run. Credit card interest rates can exceed 30%, so figure out how much of your money your credit card company is making off of you for only paying that small portion each month.
Divorcing your credit card - Stop using the credit card. Now that you've identified what you've been using credit for, and what it's costing you, focus on two things––the first is paying off the debt, and the second is not using credit for anything that cannot be paid back within the no-interest period. For many people, it is easiest to go cold turkey and stop using the card until it has been paid off, then reassessing its usage after the change. Remove credit cards from your wallet––except for your debit card. This maneuver may be a little painful at first, especially if your first inclination is to reach for your credit card; however, it's likely to be your best line of defense. Some ideas for putting use of credit temporarily beyond your reach include:
- Keep your credit cards in a safe location at home. Don't just throw them in a junk drawer or in an area where someone can pick them up and use them. Consider placing them in a file or even a home safe.
- Place the card into a plastic container, fill water and place in the freezer. You have to think long and hard before using it now!
- Resolve to reduce multiple cards to one. You could cut up all the other cards and put the chosen one somewhere safe for now. Some people don't recommend taking the scissors to all of your credit cards though, as you may need them in the future. For any cards you do decide you no longer want, be sure to go through the steps of actively closing your account, or your credit card provider may eventually apply inactivity fees to your account.
- Remind yourself constantly that anything placed on a credit card tends to cost you twice as much, thanks to fees for payments outside the interest-free period.
- If you prefer to pay with plastic, use your debit card. Understand the consequences though––if your checking account is empty, you may be rejected at the register. If you're concerned about being rejected, talk to your banker about arranging for overdraft protection (which may mean a fee) or linking your checking, savings and a line of credit account to be used as backup. However, a few times of embarrassment can pay dividend in a lifetime of keeping an active memory of just how much money you really have to spend...
- Use Internet banking to keep tabs on your expenses. In order to know what you have in your account, log onto your bank's Internet banking system at least once daily to keep tabs on what you have (and don't have). Also, consider using direct deposit for your checks to reduce the amount of time it takes for your paycheck to clear.
- Some companies will only accept credit cards, such as airlines and stadium venues. In this case, you may need to keep a credit card handy but keep to the rule that you should be able to cover the cost either immediately or within the non-interest payment period. Another alternative is to give the exact cash to a friend or family member who can pay using their credit card on your behalf.
- Consider switching to pre-paid credit cards with a limit for online purchases. This protects you from fraud (the card limit is all that there is to use) and it will stop you from overspending on online shopping.
Restoring the cash culture - Cut out all extra (non-essential) spending that cannot be covered with cash. If your debit card or cash cannot cover the expense, don't buy it. This may mean going without buying new items for several months (anything from outfits to electronics). However, if you truly want to live within your means and free yourself from credit card debt, you'll need to adhere to spending within––or preferably below––your means. Other money-saving ideas include:
If you have garden space, grow your own food. - Brew coffee at home and/or brown bag it for lunch. If your morning latte was part of your routine, you can most likely save a significant amount of money just by having your coffee at home or bringing your lunch to work. If you don't believe this, place the same amount of money it costs for that daily treat into a jar each day. Add it up at the end of the week. Multiply it by 52 weeks a year. And you will be convinced that this money soon adds up!
- Carpool with friends to work or school. With gas prices on the rise, carpooling is more popular than ever. Carpoolers can slash their gas budget and wear and tear on their vehicle, which saves at the pump and the auto shop.
- Go vintage. Hit the secondhand and thrift stores and make what was once old into something new again. The great revival of craft, DIY and restoration is making it not only acceptable but desirable to be fixing things up from the past to make them work for your future. There are plenty of great library books and free online articles on recycling old stuff into new goodies, so you don't even need to fork out any money to find out how!
- Find homemade food alternatives for food you used to purchase when out. Perhaps there's an undiscovered baker, fast food chef or soul food cook within you that's waiting to burst forth. Now's your chance to find out.
- Create a new budget that revolves solely around using cash. This may mean cutting out Friday night dinners at your favorite restaurant but in the long run, you'll be in better financial shape (you might even get a little healthier if your favorite weekly splurge was a calorie-laden feast!). Living on cash means you need to reorient your expectations about payments for things, placing the essentials at the top and non-essentials last in the queue. It may feel depriving at first, but this feeling changes when you start to savor the things you can afford and realize that instant buying ability tends to lead to poor choices and clutter. In a short space of time, you'll discover a great sense of liberty in being able to cover your expenses and treats with cash and not have to pay for them later.
- Time your bills with the arrival of your paycheck. If you are living paycheck to paycheck (now that you can't charge many items), make sure you can cover all your primary bills first by writing down the dates they are due as compared to when you get paid.
- Apply surplus cash after your bills are paid to cover credit card expenses. Consider food, gas and other necessary living expenses before paying your credit card bills. Also, if possible start saving through either an IRA or a high interest CD.
- Pay down your balance each month. This means sending more than the minimum required amount to your credit card company. The best way to get out from underneath credit card debit is to pay as much as you can each month.
- Set aside a specific amount each month to send to your credit card company(s). Consider how long it will take you to pay off each card, taking interest into consideration.
- Look for balance transfer offers to lower your interest rate. One way you can reduce your overall total is to take advantage of balance transfer promotions through your financial institution. However, inquire about transfer fees and teaser rates to ensure you will receive the same low rate for the life of the loan.
- Ask your credit card company for a lower interest rate. It never hurts to ask, plus you should also ask that the annual fee be waived. Tell the credit card company that you plan to transfer your (massive) balance to another card and then see what they can do for you.
- Spend time reflecting on the value of money, your effort and your time. Spending cash most of the time returns a keen sense of just how many hours of your labor it takes to earn an item and you soon become less willing to part with cash for poor quality or over-hyped fads. Thinking about how money is used and valued in your own life will let you face the financial truths rather than wish them away. There are plenty of excellent books and articles on good financial management––find one that has a style you like and start practicing some of its ideas to stay credit card debt-free.
- Be aware that speed is what our societies worship. Wanting things now and getting things done now is marketed as a sign of being hip, while it's implied that going slowly is uncool. Yet, it's never uncool to think carefully, decrease your debt and resist unnecessary purchases. Slow down, earn what you buy and really appreciate it.
- Although complete and utter credit card divorce is the goal, consider using your credit card every few months to keep your account active. When it comes to credit scoring, credit bureaus like to see that you are at least using your card every once and a while, but using credit wisely.
- Resist opening a retail store based credit card at the register. Many retailers offer a small discount on the initial purchase when the consumer opens a store-based credit card. However, often this results in the consumer having the card, but then not using and forgetting about it, which could have a negative impact on your credit score. (This does not apply in all jurisdictions, check the terms and conditions on the card.)
- Contact your financial institution or the Federal Trade Commission about debt or credit management. Be wary of any outside company that offers either debt management or consolidation and requires an up front fee. Many predatory companies may put cash strapped individuals in a worse position so make sure the company you work with is legitimate.
- There are numerous government based or funded budgeting tools available online that can help you to improve your financial health.
Edit Warnings - Don't run around closing all your credit card accounts. If you plan to apply for a loan any time soon, a bunch of closed accounts will send a red flag to the credit agency, which could lower your score. (This may not be an issue in some jurisdictions, check with the credit agency relevant to your country.)
- Sales are not your friend, period. Sales are the time when a lot of things end up in your house that are not needed and are not going to fit/work/be/solve all as you convinced yourself at time of purchase. Check out your clutter and all your unused items before rushing to another sale.
- Learn to curb impulse buying. It's rarely a good deal and it can be costly, especially when enabled by credit cards. Do your research on objects you know you want and take your time choosing.
- High sales pressure techniques? Just say no, over and over again. Your brain doesn't function well under the stress of pressure to buy, so remove yourself from the situation and grab some reflection time away from the salesperson. Be wary of saying you don't have a credit card––many salespersons are trained to make offers to open a credit account! A simple "no thanks" to any sales pressure is sufficient.
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