(Given the upcoming holiday shopping season (which is getting started even earlier than usual this year), there are going to be more than a few people who find themselves in trouble with their credit cards.  If you don’t want to be one of those people, it’s important to use your credit cards wisely.  One important thing to do is keep from overspending, not an easy task when there are dozens of friends and family members for whom you want to get gifts.  Enjoy the advice, and here’s to some frugal shopping this season!)

In today’s economy, it can be difficult to stay out of debt. The cost of living seems to get higher every day, and prices on the things we need can put us under very quickly. This can be the starting point of overspending, and once you start, it can be hard to quit. If you are currently an over-spender, there is no better time than now to help yourself get out of debt and start spending your money wisely.

Not having control over your finances can cause stress, anger, and even depression. The feeling of regret you get after making a large purchase will only add to these other feelings and make you feel worse than before. Stores can be tricky, and they have come up with many ways to try to get you to spend more and buy things you don’t need. However, there are changes you can make to your lifestyle and ways to recognize and avoid impulse items so that you can be sure to never make poor purchase decisions with your credit card again.

Store Tricks

The first tip you should be aware of when shopping is to be aware of the check-out counter. There are lots of items here that look really great for right now, but they are usually extremely overpriced and not necessary. If you do need something that is found by the check-out counter, you can usually find the same product somewhere else in the store for much less than they are asking at checkout. Ask yourself if you really need that item before you throw it in with the rest of your purchases.

Stores also lay out the entire store very strategically to try to get you to buy more. Thin aisles only allow two people to walk through at once, so you are forced to stop and look at the items around you. The more you stop, the more you are probably going to pick up and buy. Stores also put the most expensive or most appealing brands at eye level. You are more likely to buy the first item you see, but it may not be the best or the most cost effective. When you find the item you are looking for, search every shelf to make sure you are getting exactly the brand you need at a great price.

Don’t shop when you’re in a hurry or when you are hungry. This tip has been said many times, but it is so true that when you are hungry and are shopping for groceries, you will end up spending more on unnecessary items that you wouldn’t have bought if you had just eaten. Sticking to a list of items can help you stay on task if you do shop when you are hungry. Also, when you are in a hurry, you don’t have time to consider all of your options and find the best product at the lowest price.

Limit Credit Card Use

Limiting the use of your credit card can be very helpful with overspending. When you spend with cash, you will probably find it harder to part with your money. Use your credit card only when there is no risk of overspending, like with bills, automotive repairs, and other expenses where you can trust yourself. When you know you may have the impulse to pick up unnecessary items, use cash instead. Budget a specific amount of cash each week, and make a solid effort to spend only that amount.

Budgeting

Budgeting is such an easy solution to credit card problems, and yet it is so easily overlooked. Most people end up going into debt with overspending because they were not able to stick to a budget. That is exactly the reason why they fail. They don’t maintain the motivation to follow their budget. You need to know exactly how much you must spend each month, and follow it to the T for many months until it becomes a habit. If you slip, even just once, you will most likely fall back into your old pattern of overspending. Following a budget takes a daily commitment, and you need to decide each day that you are going to stick to it.

Jenna White is an author who writes guest posts on the topics of business, marketing, credit cards, and personal finance. Additionally, she works for a website that focuses on educating readers about getting secured credit card offers.

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I’ve been noticing lately that my spending is starting to get away from me.  There’s a number of reasons I could cite, from the fact that my job as a graduate student pays only about one quarter of the pay I had gotten used to in my previous jobs (and given the research, grading, and other outside work required of grad students, there’s little opportunity for me to get another job, or even keep up on this blog at times) to the fact that I’ve had to make some major repairs to my automobile these past few months (some of which I’ve discussed in detail already), all of which has taken its toll on my financial standing.  It’s been a rough first quarter.

But that’s not the only reason, I’m afraid.  I’ve gotten into the habit of using my credit cards for all of my spending.  This wouldn’t be bad if I was still able to completely pay off my credit card bills each month, as I did while working in my last jobs, but with my spending running at nearly twice my monthly income, that’s become a mathematical impossibility.  The simple fact is that I need to cut down my spending, and find a way to do it soon.

Considering Going Cash-Only

In this environment, I’m starting to consider adopting a cash only lifestyle.  It’s not a new idea, by any means; Dave Ramsey, among others, has built a sizable media presence by stressing the importance of not going into debt to make purchases or do other spending.  On just about every get out of debt tips list there is a suggestion, if not an order, to cut down credit card use and rely on cash.

So, the goal should be to use more of this. Although, I had this much cash lying around, I wouldn't have so many problems...

There are a number of advantages to someone who would be debt-free (someone like me) in relying on cash, and only cash, to make purchases.  Some possibilities include:

1) Keeping your spending under a set limit: By far the most important advantage of using cash (at least, for the goal of keeping your spending low) is that you need to have the money on hand in order to spend it.  Unlike with credit cards, there’s no ability to spend what you don’t have.  (Alright, I suppose you could open a ‘tab’ somewhere, but that tends to be limited to things like bars, and if you try to leave without paying it off at the end of the night, good luck getting any service the next night.)

2) It creates a stronger bond between the spending and the actual cost: It’s one of those odd aspects of human psychology, one that numerous money writers have discussed already, but we just can’t seem to get a handle on the idea that credit card spending IS real spending.  Even those of us who understand the math involved and the concept behind credit cards can’t quite seem to grasp that spending a dollar via credit card is AT LEAST as expensive as spending a dollar from a wallet (usually more so, when you factor in interest).  For credit card companies, this is probably a good thing; people who spend a great deal and don’t pay it off each month (such as, I’m increasingly afraid, myself) are amongst their biggest income sources.  For individuals, though, this disconnect can ensure that by the time the minimum payments due on their credit cards start to get hard to make, their total tab is so high that it’s simply impossible to pay it off.

3) Using cash can save you money: Behind the scenes, using a credit card costs the businesses you visit a fee each time you use them.  Yup, every time you swipe, part of your purchase price pays a fee to the credit card company.  (Fun Fact: Part of the reason why some businesses only accept certain credit cards is due to the different levels of fees charged by each credit card company; consider that the next time your American Express card isn’t accepted at a store.)

With these fees hanging over their heads, some merchants attempt to offset their costs by passing them onto you, charging credit card users higher fees.  You can see this frequently at gas stations, which will charge credit card users several cents more per gallon of fuel than cash users.  (This is sometimes limited to diesel fuels, but I’ve been charged a few cent premium for the privilege of using my card even when filling up my poor little station wagon.)  In the same token, you can also find that some companies, particularly small, independently owned businesses, may give you a discount if you provide money up front.  (There are numerous websites that note some advantages of using cash, and list companies that will cut you a break; Discount With Cash is one of those, although it is still in its early stages.)

My Plan to Go (Temporarily) Cash-Only

With all of that in mind, I’ve decided to go on a little experiment, to see how much I can improve my finances by locking away my credit cards.  For the rest of the month, I’ve decided to go only cash with the rest of my spending.  (Well, I’ll be writing checks to cover my bills, but that’s a form of cash.)  I admit, it’s perhaps not the most ambitious goal; there’s only a little more than a week left in the month, and if all goes according to plan, I should spend nearly all of it at school, where my spending is much lower than when I go to visit my fiancee or my family.

Still, I think it would be good to prove to myself that I don’t need to spend a great deal of money to live my life, and live it well.  Plus, if I get in the habit of keeping my spending limited to my cash on hand for a week, I can probably stretch it to, say, two weeks, then perhaps a month, and then maybe several months, and from there… Well, as way of reworking how I think about my spending, it should be a pretty good experiment.

Any advice on keeping my spending to a minimum?  Anyone care to share their own thoughts on a cash-only spending lifestyle?

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In the course of your life, you’re going to have to many different things you want to accomplish with your money.  That’s just the nature of life; we all have more than one goal we want to accomplish at a time, and given the reality of a capitalist system, most of those goals are going to involve earning, saving, and investing our money in order to reach them.  The question we have to face, then, is how do we prioritize our goals in order to accomplish everything we want to accomplish, given our financial and other limits?

Let’s use my finances as an example (only fitting, since it is my blog).  After I take care of my general monthly expenses (rent, utilities, etc.), I have some money left over, which I apply to one of my larger, unable to be fulfilled in a single month goals.  Currently, I have four them: Paying off my Mastercard debt, paying off my American Express debt, paying off my student loans, and investing for the future (both in retirement accounts until I’ve maxed out my contributions, and then in non-retirement accounts).

No sailboats on my priority list (yet)

How do I decide which goal to put my money towards first?  Well, my first consideration is

Interest Rates

As I’ve discussed before, one of your first considerations when deciding which financial goal to pursue is the associated interest rate (because compound interest can be both a friend, and an enemy).  High interest rates will either cost you a great deal of money (for your debts) or earn you a great deal of money (for your investments).  In either case, finding the financial goal with the highest associated interest rate will enable you to maximize the effectiveness of the money you put towards the goal.

In my case, the choice for highest interest goal is pretty easy; my Mastercard has an associated interest rate of 29.99% (plus the prime rate, I believe, which is currently zero).  (In case you’re wondering why my interest rate is so high, it’s because (a) it’s a department store credit card, (b) I got it back when I was in high school, and (c) I’ve never tried to have the interest rate lowered, although that’s something I’m adding to my To-Do list.)  None of my other financial priorities has an interest rate anywhere near that amount.  For every hundred dollars I put towards paying down this debt, I can save more than $30 over the next year, to say nothing of years down the line.

On the other side of the equation, my lowest priority goal is also pretty easy to determine.  My student loans have a fixed interest rate of 2.85%; that’s less than half of the rate for any of my other goals.  Because of that, I only pay the minimum amount I have to towards paying off my student loans; by putting my money into goals with higher interest rates, I’ll have more money to pay off my student loans when I finally get around to it years from now.

The last two goals are a bit harder.  My American Express has an interest rate of 7.99%, while my investments, assuming they perform as they have in the past (a big assumption, particularly given the way the economy has performed these past few years) should average around 10%, give or take a few percentage points.  Just on the basis of percentages, the ideal solution would seem to be to max out my investments, while paying the minimum (or a bit more) on the Amex.  But that plan ignores the difference between

Fixed and Variable Returns

Again, I’ve discussed this before, but it bears repeating: it’s usually better to put your money towards slightly lower fixed returns than somewhat higher variable ones, particularly in the short term.  In one, three, or even five years from now, the volatility of investments in something like the stock market will likely make fixed returns look more attractive.  For this reason, I’m planning to put more of my money towards paying down my Amex, and only investing a fairly small portion of my ‘extra’ money until all my credit card debt is gone.

But What About An Emergency Fund?

I’ll be the first to admit, I don’t have much of an emergency fund at the moment.  When you have debt with nearly 30% interest, or even 8% interest, it doesn’t make much logical sense to save money at 2% interest (and given the current interest rate climate, that’s if you’re lucky).  On the other hand, having some money available that can be quickly accessed in case of an emergency is usually a plus.  In my case, it’s especially important; one of the realities of being a graduate student is that when summer comes, my major source of income, my stipends from grad school, will decrease significantly, while my free time to get another job will be largely nonexistent (thanks to the research I need to do in order to graduate).  Having enough savings to cover a month or two of expenses will be necessary.

In my attempt to play Solomon, the best course of action seems to be putting money towards an emergency fund at the same time I’m working to pay off the Amex.  I’ll have at least one credit card paid off, and if my financial calculations are complete, that should allow me to build up a pretty solid emergency fund by the start of the summer.

Overall then, my plan looks like this:

-Start by paying down my Mastercard tab as quickly as possible (I’m still in the grace period for my most recent expenses, but that won’t last)
-When the Mastercard tab is gone, begin splitting money between American Express and saving for an emergency fund (with perhaps one hundred or so a month being put towards investing)
-Once the emergency fund is sufficient, get even more aggressive on paying down the American Express (and bump up the investment amount)
-After the American Express tab is paid off, start going whole hog into investing (assuming I haven’t exhausted the emergency fund and need to refill it, then split the money between emergency fund and investing), and
-Pay only the minimum necessary on the student loan for as long as possible; at less than three percent interest, it’s cheap money.

So, how does my plan sound?  Are there goals or other factors that I’m missing?  How much do you rely on interest rates to determine the order of your financial goals?

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Happy CARD Day!  If you’re asking yourself, ‘just what the heck is Roger talking about?’, you’re in luck; in honor of CARD Day, I’ll take a few moments to go over the fun and joy of the CARD Act and how it affects you, and your credit cards, too.

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009, more commonly called the CARD Act (get it?  get it?) imposes new rules on credit card companies.  The rules are designed to protect credit card users from some of the more, uh, ‘questionable practices that credit card companies have used in the past.  A fact sheet goes over all the gory details of what is now longer allowed in the world of credit cards; a few of the highlights include:

-Restricting rate increases on existing balances.
-Contract terms must be constant for at the least first year of service
-Ends ‘double-cycle’ billing (when the balance from the previous month would be used to calculate the owed interest, enabling the companies to charge for balances that had already been paid off)
-Requires credit card users to opt-in before they can go over the limit on their cards.
-Applying payments over the minimum to the highest interest rate debt.
-Most sobering to anyone who keeps a balance, the credit card companies will also have to provide the amount of time needed to pay off the total amount owed if only the minimum payment is paid.

All told, a great victory for credit card users!  Take that, credit card companies!  Under these new rules, things are going to be much better for consumers; no more worries about abuse from credit card companies.  If a one or two major credit card providers have to go bankrupt, so be it.

Except…they haven’t, have they?  You may have noticed that American Express hasn’t packed up their bags and left town, nor that MasterCard didn’t tell their employees not to bother coming in today.  Heck, if you’ve been following the Olympics, you’ve probably noticed that not only is Visa advertising repeatedly, but they are offering the opportunity to win trips to every Winter Olympics in the future.  If these regulations are rein in credit card companies so much, how do they still have so much money.

Unintended Effects

As you might have guessed, the credit card companies haven’t spent the nine months since this bill was first signed (back in May of 2009) just waiting for the new rules to come into effect.  In the time they had to prepare, there have been signs of the credit card environment as it will exist under this law; higher interest rates, more fees, and less rewards.

It’s also harder for customers with low credit scores to get cards (or to keep cards when they don’t use use them often), and credit limits are being lowered for many credit card users.  Ironically, some of the people this legislation was designed to help may end up suffering the most by being unable to get any credit at all.

(All of this doesn’t touch upon one of the more controversial elements of the CARD act, preventing those who are under 21 from getting a credit card without either (a) proof of income or (b) a co-signer.  I’ve maintained that this is just common sense; if we were talking about 4o year-olds rather than typical college students, I can’t imagine it being a major issue.  The only reason college students get targeted by card companies is the assumption that the Bank of Mom and Dad will be around to bail them out.  Of course, there are those, like Stephanie of Poorer Than You, who might vehemently disagree.)

What to Do as a Credit Card User

What are you, the hapless credit card user, supposed to do?  For the most part, the same thing you should have been doing even before this act went into effect.  Pay off your credit card balance in full each month, don’t charge more than you can pay off, and work to pay down your debt as aggressively as possible.  Basically, the Commandments of Credit Card usage are still in effect.

You will may have to make some changes to your behavior as a result of the new rules, though.  With companies more likely to cut your credit limit or close your card, it’s important to regularly use all your cards in order to keep the accounts from being closed.  It’s also important to have an emergency fund other than your cards, as the credit line you are depending on may disappear just when you need it.  If you’re trying to build up points for rewards, also be sure to keep an eye on the rules; it’s possible that the number of requirements and restrictions will increase as companies try to maximize their profit levels.

Follow these precautions, the CARD rules will be nothing but good for you!

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Credit cards have become a regular part of most of our lives.  Most of us use them as our major method of paying for our purchases.  A large portion of them (including me) even make it our primary method of payment, because of the ease of use, the rewards offered by the credit card companies, or simply our own personal preferences.  Yet, we also know that they can be hazardous to our financial health; stories abound of people who have accumulated tens of thousands of dollars in credit card debt, sometimes even more than they can pay.  Sometimes they remain in debt for years or decades, unable to make any progress toward paying down their debt.

How can we use credit cards without being overwhelmed by them?  We have to be careful with how we handle them, ensuring that they work for us, rather than forcing us to work for the credit card companies.  To help show you how to do this, I present The Ten Commandments of Credit Cards, ways to maximize the advantages of your credit card use while preventing (or reversing) the damage that improper use can cause.  Unlike the original Ten Commandments, not every commandment below will apply to every person with a credit card; different people have different relationships with credit cards, and thus, need to hear different advice.  With that in mind, let’s consider some words of wisdom for those men and women who can use credit cards without ending up in debt.

For Those With No Credit Card Debt…

I) Don’t Build Up Debt – It sounds pretty simple, but that’s really the heart of smart credit card use.  If you pay off the balance in full each month, you’ll be able to use credit cards without having to pay interest or penalties.  If you have a rewards card, you’ll also be able to build up airline miles, points or even cash simply by doing your regular, everyday spending.  Getting money from credit card companies without giving them any of your own; that’s the pinnacle of good credit card usage.

Resist the Lure of the Card Reader...

II) Budget For Your Credit Card Bill – Sit down and make up a budget showing how much income you have each month, as well as all the expenses you have to pay out.  Once you know how much of your income is left after rent/mortgage payments, utilities, insurance payments, savings, and investing (for retirement or other goals), you’ll have to know how much you can afford to spend.  Spend less than that amount and pay it off each month in order to keep yourself debt-free.

III) Don’t Spend More to Boost Your Rewards – If you are using a rewards card, it’s very tempting to spend more money than you can really afford in order to boost your potential rewards; I know, I’ve faced that temptation myself.  Just remind yourself that even the highest rewards offered by credit cards are much lower than the interest rates for balances on said cards, and that staying within your budget will be much better for your bottom line.

IV) If the Temptation is Too Great, Drop the Card – Sometimes, you just need to get away from any sort of temptation.  If you find yourself spending up to the limit of your credit card budget, or even going over it,  the better part of smart money management might be to eliminate the temptation.  Relying on cash, debit cards, and checks will limit you in what you can spend, enabling you to better control your spending.  No reward or purchase is worth the chance that you will find yourself owing more than you can afford on your credit cards.

For Those With Manageable Credit Debt…

V) Stop Adding to the Debt - If you have credit card debt, the first order of business is to stop adding to it.  Spend less on your cards than you can pay off each month, so you can apply the excess to paying down your previous debt.  If you are still having trouble using credit without increasing your debt, take the advice from Commandment IV and drop your card; relying on other methods of payment, particularly cash, will cut down the your urge (and ability) to spend more than you have available.

VI) Aggressively Pay Down Your Debt – If you’re only paying the minimums on your credit cards, you are going to be paying for a very, very long time.  You need to pay down your debts aggressively, putting as much money as you can into paying down your debt.  Don’t empty your emergency fund or take money from your retirement account, but set a goal for each month above and beyond the required minimum, an amount you will pay in addition to the minimum charged by the credit card company (which is usually far below what you will need to pay to really cut down your debt).

VII) Negotiate With Your Card Company – Asking your credit card company to lower your interest rate will lower the amount you will pay overall as well as the increase in your debt from month to month.  If you are a good customer with a strong history of repayment, particularly if you have offers for balance transfers from other card companies, you can likely get your rate reduced, making it easier to pay down your debt.  Combine that with the above tactics, and you can hopefully cut your debt down in no time flat.

For Those With Unmanageable Debt…

VIII) Cut Down Your Spending Drastically – If you are so deeply in debt (credit card or otherwise) that you are having serious trouble paying it down, it’s (past) time to slice your spending to the bone.  Cut out most of the luxuries (slowly, if need be) in your life, reduce the costs of recurring bills (by cutting services and added features), and reconsider both the major and minor expenses in your life.  Dealing with a major debt requires a major commitment; slice your expenses as slim as you can, and put the money into debt repayment.

IX) Consider Consolidating the Debt – If the amount of credit card debt you have is too much for you to pay it down, one option is to consolidate it; that is, paying off the outstanding credit card debt with another loan, possibly from a family member or peer-to-peer lending network like Lending Club.  (Be leery of commercial ventures that offer to consolidate your debts; as with anything that involves money, scams are possible, even likely.  Thoroughly research any companies before you give them your trust and financial information.)  If you do go this route, do NOT keep using your credit cards; the last thing you need is more credit card debt on top of your new loan.

X) Talk to the Card Company (Again) - Interestingly, even if the card company is not willing to work out an arrangement to help you pay down your debt when you don’t owe much, they could be willing when you are deeply in debt.  If you are on the edge of bankruptcy, they may be afraid that they will have to write off your debt completely.  (Since credit card debt is unsecured, that is, not backed by any tangible asset like a house or a business, it’s much harder for credit card companies to collect anything in cases of bankruptcy.)   Attempt to come to some agreement that will enable you to eliminate the debt while making reasonable payments, and be sure to get verification so you have proof of the new arrangement.

If you follow this advice, you should be able to get out of debt and/or stay out of debt, and avoid having to consider bankruptcy or other much more drastic measures.  Good luck with proper care of your credit card!

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