Summer 2009 | Volume 107 | Number 652
Balancing Act
A bit of financial savvy will help you avoid debt and maximize savings – even in this economy.
If this financial crisis has one resounding theme, it's that borrowing and spending more than you can afford is a dangerous practice. It has contributed to the $1.8 trillion federal budget deficit and the millions of bankruptcies and foreclosures this past year, according to data from the Congressional Budget Office, U.S. Federal Courts and RealtyTrac. It's also the story behind our whopping $955 billion credit card debt, according to the Federal Reserve Bank.
Sandy and Doug Gaston aren't lavish spenders. They don't drive fancy cars or live in a mini-mansion. But the Orlando, Florida, couple managed to rack up $40,000 of credit card debt – and that was during good economic times.
The trouble began in the mid-'90s, when Doug was laid off from his job. The Gastons, members of Thrivent Financial for Lutherans, used their credit cards as a stopgap, but when the next seven years brought a string of hirings and layoffs for both Gastons, their short-term solution became a way of life. The couple paid with plastic whenever they could – for groceries, highway tolls, home repairs … the list goes on.
As their debt mounted, they tried to control the interest fees with balance transfers, but a missed payment led the card company to raise their rate to more than 25%. Interest charges at that rate put them over the card's limit and led to more fees. Realizing they would never get ahead of the debt, the Gastons declared bankruptcy – and swore off credit cards for good. That was seven years ago. To this day, they don't make purchases if they can't pay in cash, and their only debt is on their home.
"The biggest adjustment is that we don't make everything happen now,'' Sandy says. "We save until we have enough money for the things we want.''
"We learned the hard way,'' Doug adds, "that you can't just spend what you don't have."
Although credit cards can be a saving grace when it comes to, say, establishing credit, buying plane tickets or renting a car, the ease with which they let us buy now and put off paying – as interest and fees accrue – has led countless cardholders into dire straits.
To protect against further losses, card issuers are slashing credit limits and hiking rates. Yet legions of unemployed and cash-strapped consumers are hard put to find more affordable alternatives. For most, the solution isn't to swear off credit entirely. If you take proper precautions, buying on credit can work in your favor. Debra Harvey, vice president of consumer banking at Thrivent Financial Bank, offers the following dos and don'ts to help you use your credit cards wisely:
Do:
- Pay in full each month. If you cover only the minimum, it can take years to pay off a balance, and with fees and interest, you'll end up paying far more than you charged. If you can't afford the full amount, pay as much as you can.
- Read the fine print. Many cardholders don't realize that their interest rates are higher for cash advances than for purchases or that same-day payments often carry a fee. Your original agreement lists the terms, which your issuer can change at any time, so watch for updates in the mail.
- Know your balance. Keep track of your outstanding and available -balances so you'll know if you can afford a purchase before you make it. If it's a necessity but you won't be able to pay it off right away, put it on the card that has the lowest interest rate.
- Use for emergencies. A credit card can be a lifesaver if your car breaks down, you need a hotel reservation or you lose your job. And if you maintain a debt-free card, you'll have more available credit when you need it.
- Charge regularly. Card companies are closing underutilized accounts with increasing frequency – often without warning. Keep your card active by using it at least once a quarter for necessities such as groceries or gas.
Don't:
- Miss a payment. Pay on time to prevent late fees, rate hikes and credit-score damage. Setting up automatic payments helps ensure against delinquency.
- Be seduced by the ability to pay later. Plan and save for large purchases rather than breaking your budget with credit. If you don't have the cash to cover a necessity, put off the purchase for a week to see if you change your mind about just how necessary the item is.
- Charge to your limit. Just because the bank allows you a five-figure credit limit doesn't mean you should charge that amount – or anywhere near it. Your debt-to-credit ratio (the amount you owe compared to your available credit) should be 30% or less.
- Get burned by balance transfers. Transferring high-rate balances to a low-rate card can help cut costs for a period, but a late payment will send your rate soaring. Also, beware of hidden fees.
– N.W.
Read More: