Cash or Credit - Which Should You Use?

As a general rule, you should never buy something with a credit card unless you have the money to pay off the charge. Many people like to buy things on credit (even though they cannot normally afford the item) with the intention that they will pay off the purchase in the long term. This is a mistake because you will end up paying more in interest than you would have had you paid cash.

Another way to use a credit card is as a rewards point builder. First and most obviously, you must have a rewards credit card for this to work. The process is very easy from here. All you do is use your credit card to make specific purchases throughout the billing period. When your bill becomes due, you pay off the entire amount. Obviously, you have to have the money available to pay off the entire monthly amount. Additionally, you must keep very accurate records of your charges in order to ensure that you have enough money on hand to pay off the monthly balance in full. The whole purpose is to build reward points without paying interest on your charges. Keeping accurate records and charging only specific purchases will help you accomplish this goal.

Most people are surprised when they get their monthly bill because they do not realize how much they have spent on food and gasoline. These charges can add up fast. If you are responsible with your credit and keep accurate records, this should not be a problem. How do you know if you are a responsible credit user? Let me put it this way; if you have to ponder whether or not you are a responsible credit user, chances are that you are not. This does not mean that you cannot utilize the rewards points strategy; all this means is that you probably should not purchase food or gas on credit because there is a chance you will charge more than you can afford. If this is the case, you should use cash (or a debit card) for food and gasoline purchases.

Basically, everything comes down to responsibility. If you are responsible, you could use cash and credit interchangeably without worry of getting in over your head. However, responsible or not, always keep accurate records of your credit so that you do not lose track of your spending.

Saving Money While Paying Off Your Credit Card Debt

Credit card debt can be a real financial drain. You have all heard the statistics and seen the commercials. If you made only minimum payments, it could take you over 7 years to pay off a debt of only $2,000! This is insane! Why pay off the interest when you could be paying off the principal? There are some simple steps you could follow in order to save money on your credit card debt.

First, you must make more than the minimum payment. If you broke down the minimum payment, you would discover that almost half of it goes to paying interest. This is money that you are paying that is not reducing your outstanding balance. If you pay more than the monthly payment, more money goes to the pay off the principal and thus, it takes less time to pay off the debt.

Second, you can utilize a balance transfer. This option is only good if your interest rate is high. Sometimes, credit card companies will offer to give you a card with a 3, 6, 9, or even 12 month interest free or very low interest rate (usually around 2%) introductory period. After the introductory period, the interest rate resets to the default rate. If this default rate is lower than you current interest rate, you should transfer your balance to this new credit card. It is a very simple procedure, you will save tons of money because you will significantly pay down your debt during the introductory period, and your default interest rate on the new card will be better than the interest rate on the current card thus, saving you more money. Everybody wins!

Last, you can call your credit card company and ask for a lower interest rate. You have to have good credit to do this and usually have to have had an account with the credit card company for over six months. However, if you can take advantage of this, I suggest that you do. Many people do not know that you can negotiate with your credit card company and raise your credit limit and reduce you interest rate. If they seem reluctant at first, threaten to close your account. Make them believe that you can receive a better deal elsewhere. Better yet, have a better deal waiting and see if your current company can match it. If they claim they cannot, tell them that you will no longer do business with them and hang up. However, do not close the account because this would negatively affect your credit score. Instead, never use the card and see if your current company comes around.

Saving money on debt is possible; you just have to know where to look and what to do. Take advantage of these easy to use tips, and you will be debt free for less money in a faster time frame!

Should Teens Have Credit Cards?

A teen should have a credit card in order to teach him/her about financial responsibility. Of all the subjects we learn in school, we are never taught about finances, credit, or money management. This lesson is usually left to our parents. The problem with this is that many parents are not qualified to teach their children about money management. Therefore, the children walk blindly down the financial road only to meet numerous pitfalls and debt traps. One way to combat this potential for financial failure is to teach children about money management.

I use the term “children” loosely. I am not advocating that you sit your six old down and tell him/her about interest rates, credit scores, and investment risk. Absent you child being a financial prodigy, a six year old will not understand any of these subjects. However, once your child reaches fourteen, fifteen, or sixteen, lessons about financial independence should begin. I advocate these ages because these are the ages when most teens get their first job.

Bill Gates could lecture you about “how to become a billionaire,” but none of the information will be useful unless you can put the information into action. I feel the same way about teens and credit. You could lecture your teen about how credit cards work, the importance of timely payments, credit limits, and credit scores, but until a teen actually uses the card and pays a bill, he/she will never fully grasp the principles of this important financial tool. This does not mean that you should drop a $10,000 limit gold card into your teen’s hands and tell him/her to “go nuts.” However, there are many credit cards with a $300 - $500 limit that should be used as the teaching card. This amount is high enough so that your teen could actually use it, but low enough so that if your teen has a job, he/she will not get into trouble.

The credit lesson has to be taught carefully and slowly. It is very easy to lose track of how much you are spending with a credit card. Therefore, it is vital that a teen learn that a credit card is not a substitute for cash. Meaning, if you cannot afford to buy something, you should not put it on your credit card.

Teens should have credit, but only as a privilege used as a tool for financial education. A credit card, like a driver’s license, is a privilege, not a right. Therefore, teens should first be educated, and then be allowed the privilege of credit card use. They should always start small and SLOWLY build their credit limit. As a parent, you can always monitor your teen’s credit use to insure that your teen is using credit correctly.

What is Universal Default and How Does it Affect Your Credit?

Universal default can be a big problem. Have you ever looked at the terms and conditions of a credit card? Somewhere in the fine print you might discover that your particular credit card is subject to universal default.

What is universal default? Universal default is a practice in the financial industry where a loan that you have goes into default (whatever the default terms are under the agreement of said loan) when you default on another unrelated loan. In other words, if I have two credit cards, Credit Card A and Credit Card B, and Credit Card A is subject to universal default and I have NOT defaulted on said credit card but I have defaulted on Credit Card B, Credit Card A would then be in default.

Why is universal default a problem? Universal default is a problem because it can negatively impact your credit score. If you are never late on any payments, then this financial practice is unimportant, however, if by misfortune, mistake, or some other accident you are late on a loan payment (and thus in default) you can get dinged twice (once for the account for which you are in default and once for the card that practices universal default) for one accident. This in turn has a double negative impact on your credit report and credit score.

Universal default does make some sense if you think about it. A person’s credit worthiness is based on how likely a person is to pay back a loan. The more risky a person, the more unlikely he/she is to pay back a loan. Think about it like this: If a person defaulted on Loan A before applying for Loan B, that person would most likely be denied for Loan B. Why should this change if said person already has acquired Loan B? Is not that person still just as risky before acquiring the loan as he/she is during (post acquisition) the life of that same loan? Although this may be true, my thought is, why put yourself in harms way? Do not take on more risk than you have to. There are plenty of credit card companies that do not practice universal default, therefore, acquire those cards and save yourself the headache should you accidentally or even intentionally miss a payment on one loan.

Testimonies: How Debt Can Make You Feel

Okay, time to confess a secret. At one point of in my life, I could no longer manage my debt. I did not file for bankruptcy and all the debt is now paid off (it was all credit card debt), but there was a time when I did not know what I was going to do.

The constant worry is a nightmare. You never know how you are going to pay next months bills, and you are always wondering how long you can keep it up. The funny thing about credit card debt is that it does not suddenly appear. It is a process over many months. You keep spending and paying the minimum balance. Before you know it, your cards are maxed out, and paying the minimum no longer works because the interest on your balance is more than the minimum payment.

I had trouble sleeping and when I did sleep, I would have dreams where I would lose my teeth. I looked at that particular dream in a dream dictionary and found out that dreaming about losing your teeth means financial hardship. Crazy, huh?

I decided to do something to change my situation. My solution was to do debt consolidation. The advantages were that my debt was consolidated into one, low monthly payment and that the interest rates on the credit cards were reduced. Therefore, I was able to pay down the balance a lot quicker. The disadvantage is that once you choose this option, the credit card accounts that are included in the consolidation are closed. The disadvantage of this is that it negatively affects your credit rating. Your credit rating is not substantially lowered, but the decrease is noticeable. Additionally, when you are enrolled in the debt consolidation program, a note appears on your credit report that your are enrolled in a debt consolidation program.

This is how I dealt with the debt. Today, I am very responsible with my credit. My credit score has been completely revitalized, plus more, and I am debt free. Being debt free is the best feeling. Have you ever been in a similar situation? How did you deal with it or are you still dealing with it?