I love credit cards. What I don't like is credit card debt. Credit cards are wonderful cash management tools, and I encourage you to obtain one and keep it with you. If the car breaks down during a road trip, you can pay for repairs and overnight lodging. If Aunt Ida needs you to care for her, you can buy a plane ticket to see her right away.
So I have no problem with credit cards. What I have a problem with are people who don't pay them off every month, and with people who own assets that produce lower returns than the cost of the debt, when they should be selling the assets to eliminate the debt.
How to Handle Credit Card Purchases
Most of us use credit cards often. Although you write a check to "VISA" or "DISCOVER" or whatever, that obviously doesn't reflect what you bought. Therefore, you must break down the invoice, itemizing the bill across the many categories you've established.
But what if you're only making a minimum payment, or if you already had a balance, added to it, and now are making only a partial payment? It can get confusing, and here's how to solve that problem: Go get a new credit card.
Yes, go get another card. How many debt counselors advise people that they need to get more credit cards to help them get out of debt!
I want you to get a new card because I want you to stop using all your existing credit cards. By placing all your new charges on the new card, you'll be able to track them each month. And make sure you pay off the balance in full every month. If you won't be able to pay off the balance at the end of the month, you have no right to use the card now. Remember, a credit card is merely a way for you to use the bank's money for 28 days instead of your own. If you can't pay for an item with cash, then you can't use the card, either.
By using the new card, you're not using the old ones -- but you still have balances on them. That means you need a category called DEBT SERVICE. And as you make payments to those old cards, this is where you list the payment. This way, you can ignore what the money was used to buy. Those purchases are ancient history; All that matters now is paying off the debt.
Two Tricks to Help You Pay Off Your Cards Each Month
If you are concerned that you don't have the discipline to pay off the balance in full each month, get an American Express card instead of VISA, Mastercard, or Discover. American Express is a charge card, not a credit card. Amex does not charge interest. Instead, you MUST pay the full balance every month.
Here's another trick that might help you pay off the balance each month: Every time you use your new credit card, immediately write a check payable to VISA (or whomever) for the amount you just charged. If you spend $35 at a store and put it on VISA, write a check for $35 to VISA right away. Then put the check in your drawer, and when the bill shows up, just slip the check into the envelope. You will have already debited your checking account, so the money is already there to cover the bill when it arrives.
Financial advisor and educator Ric Edelman is the best-selling author of five books, including Ordinary People, Extraordinary Wealth, The Truth About Money, Discover the Wealth Within You, The New Rules of Money and Financial Security in Troubled Times. His firm, Edelman Financial Services Inc., is one of the largest independent financial planning firms in the nation with nearly $2 billion in client assets under management. He also hosts weekly radio and TV shows in Washington, D.C. and is the founder of the Edelman Center for Personal Finance Education. Visit Ric online at www.RicEdelman.com.