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The #1 Mistake Consumers Make with Credit Cards

cc.jpgIf you have trouble controlling credit card debt, I have a simple rule for you:

If you can’t afford to pay for an item with cash, you can’t afford to pay for it with plastic either.    If an emergency forces you to buy something you cannot afford (it happens, I know), make sure you are brutally honest in your assessment of what you really need. If you don’t need something, don’t charge it. I know people who pay 18% interest on Hostess Twinkies.  Come on now.  You know better.

The most common mistake consumers make with credit cards is using them as income supplementation.  Instead of using them for emergencies or convenience, they use them as additional salary.  So let’s agree right now that credit is not salary.  Credit belongs to a lending institution.  Credit must be repaid.

How Much Debt is Too Much?

Financial gurus suggest that total debt, excluding first mortgage, should not exceed 20% of take-home pay. This includes car payments, home equity loans, second mortgages, credit card debt, and so forth.  Upper income consumers may be able to handle higher debt loads due to greater expendable income, while lower income consumers may be wise to carry less.  

Of course, you probably know if your debt load is too high without whipping out your calculator.  If you honestly don’t know, here is another rule of thumb: If you can’t pay off your credit card balance in full every month, you have too much debt. Credit cards, when used responsibly, help shift the timing or increase the ease of making payments – They do not exist so you can run up debt you cannot pay.

Why Do You Buy? 

The buying impulse is so strong in some people that they actually believe credit card dept is their only option. Telling these people they don’t need that extra purse, pair of shoes, or suit is like telling them they don’t need food or water.

A close friend of mine used to struggle with spending. She could barely pay her utility bills and was always borrowing money from friends to keep the electricity from getting shut off. Despite her obvious lack of funds, she somehow managed to keep her closet stocked with new clothes.  And there always seemed to be a new package showing up on her front porch containing things she’d purchased from the Home Shopping Network.

She tried to justify these purchases by saying, “John, you know I need to buy new clothes so I can look professional when I’m at the office.”

Well, yes, it’s important to appear professional, but she did not need to buy expensive clothing every week. 

Eventually, my friend was forced to declare bankruptcy.  I still remember her sitting there on her sofa, surrounded by shoes still in the box and clothes still tagged. She looked at me and said, “John, I don’t think I bought any of this stuff because I needed it. I bought it because I thought it would make me feel good.”

“Did it make you feel good?” I asked.

She paused, touching her chin. “I thought it did at the time. Now, seeing all this stuff I never used, I guess not.”

The emotional high that comes from buying something new is short-lived and cannot compensate for the emotional burden of carrying too much debt.

But What if You Really Do Need It?

Yes, there are times in life when credit can help you out of a jam.  The key is being honest about what you need.  The first step toward the responsible use of credit is learning to differentiate between necessity and desire. 

The second step is treating every credit purchase like the debt that it is.  Always pay more than the minimum payment.  Dedicate yourself to getting rid of that debt as quickly as you can.  Instead of throwing a few extra bones toward the payment whenever you can swing it, actually sit down and draft a timeline for expedient payment.  

If you take your debts seriously, you’ll pay them off more quickly, pay less interest, and be in a better position the next time you need to finance something.

You are Reading an Article Series — Rescue Your Life From Stress!

  1. Series Intro: Rescue Your Life From Stress!
  2. Debilitating Stress, a Warning You are Out of Balance
  3. The Key to Building a Strong Personal Foundation
  4. Control Your Spending
  5. The #1 Mistake Consumers Make with Credit Cards
  6. 3 Steps to Reducing Stress Caused by Unnecessary Obligations

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