Resisting the Credit Temptation

Some debt is good and some is bad. Debt used for investing in your future, such as borrowing money to afford an education, buy real estate, or invest in a small business, is good debt. But accumulating bad debt (consumer debt) is like living on a diet of sugar and caffeine: a quick fix with no long-term nutritional value. Borrowing on your credit card to afford that vacation to Cabo is costly and detrimental to your long-term financial health.

Getting rid of your consumer debts may be even more difficult than giving up the sugar-laden foods you love. But in the long run, you'll be glad you did; you'll be financially healthier and emotionally happier. If you have the savings to pay off high-interest credit card and auto loans, do so. You diminish your savings, true, but you also reduce your debts. You benefit financially because the interest on your savings is far less than the interest your debt accrues. Make sure to pay off the loans with the highest interest rates first.

Having consumer loans on a credit card at, say, 12 percent and paying them off is like finding an investment with a guaranteed return of 12 percent — tax-free. You would actually need an investment that yielded even more — around 18 percent — to net 12 percent after paying taxes in order to justify not paying off your 12 percent loans. The higher your tax bracket, the higher the return you need on your investments to justify keeping high-interest consumer debt.



After you get rid of your high-cost consumer debts, practice the best way to deal with credit problems: Don't take on consumer debt.In addition to eliminating all your credit cards and getting a debit card, you can use the following tactics to limit the influence that credit cards hold over your life in the future:


Don't keep a credit card that charges you an annual fee. Many no-fee credit cards exist — and some even offer you a benefit for using them. For example, Discover Card ( 800-347-2683) rebates up to 1 percent of purchases in cash. GM Card ( 800-846-2273) gives credits worth 5 percent of charges toward the purchase of a GM-manufactured vehicle. (Saabs, Saturns, and EV1s are excluded.) No-fee cards are also offered by AFBA Industrial Bank ( 800-776-2265) and USAA Federal Savings ( 800-922-9092). Only consider these four cards if you pay your balance in full each month because you'll pay high interest rates for balances carried month-to-month. There's not much point in earning a small reward only to have it negated by greater interest charges.


Don't be tempted to charge more on a card simply because it rewards you for purchases. Spending more than you would otherwise to rack up bonuses defeats the purpose of getting the credits.




Reduce your credit limit. If you choose not to get rid of all your credit cards or secure a debit card, be sure to keep a lid on your credit card's credit limit. Just because your bank keeps raising your credit limit to reward you for being such a profitable customer doesn't mean that you have to accept the increase. Call your credit card service's 800 number and lower your credit limit to a level you're comfortable with.


Replace your credit card with a charge card. A charge card (such as the American Express Card) requires you to pay your balance in full each billing period. You have no credit line or interest charges. Of course, spending more than you can afford to pay when the bill comes due is possible. But you'll be much less likely to overspend if you know you have to pay in full monthly.


Never buy on credit anything that depreciates in value. Meals out, cars, clothing, and shoes all depreciate in value. Never buy these things on credit. Borrow money only for sound investments — education, real estate, or your own business, for example.


Think in terms of total cost. Everything sounds cheaper in terms of monthly payments — that's how salespeople lure you into buying things you don't have the money to afford. Take a calculator along if necessary to tally up the sticker price, interest charges, and upkeep. The total cost will scare you. It should.


Stop the junk mail avalanche. Look at your daily mail —half of it is probably solicitations and mail-order catalogs. Save some trees and your time sorting junk mail by removing yourself from most mailing lists. Write to the Direct Marketing Association, Mail Preference Service, P.O. Box 9008, Farmingdale, NY 11735-9008. To remove your name from the major credit reporting agency lists that are used by credit card solicitation companies, call 888-567-8688. Also, be sure to tell any credit card companies you keep cards with that you want your account marked to indicate that you do not wish to have any of your personal information shared with telemarketing firms.


Limit what you can spend. Go shopping with a small amount of cash and no plastic or checks. That way you can only spend what little cash you have with you.

Remember, the best way to reduce the costs of debt is to avoid it in the first place when you're making consumption purchases.

If you have a credit card that charges an annual fee, try calling the company and saying that you want to cancel the card because you can get a competitor's card without an annual fee. Many banks will agree to waive the fee on the spot. Some require you to call back yearly to cancel the fee — a hassle that can be avoided by getting a true no-fee card.