Friday, September 11, 2009

By 

James W. Stone

If you find yourself with credit card debt and are looking for a way to keep from getting deeper in debt, you might be thinking about cutting up all your credit cards. After all, that is one recommendation you hear from many people who want to "help" you. I don't think cutting up the credit cards is the way to fix your problem, though.

One reason this isn't a "fix" is because there are some transactions where you need some form of credit card. If you need to buy an airline ticket, reserve a hotel room, or rent a car, you really need to use a credit card or a debit card. So, cutting up all of your cards isn't the solution. The real solution is to have the right kind of credit card and to use it in the right way.

If you follow my thinking here, I am starting out by saying you need at least one credit card. But, that one card needs to be a card that provides you with services you need … and you need to use that card correctly.

Let's start out looking at the cards available to you. There are debit cards, credit cards, and pre-paid credit cards. I don't like pre-paid credit cards because they often have fees associated with setting up the account and there may be fees related to each transaction you make with the card. But one of the biggest problems with pre-paid credit cards is if you lose the card, or it is stolen, there is usually no way to recover the money remaining on the card in a reasonable period of time, if at all. So that leaves the debit card and the credit card to consider.

The debit card is linked to your bank account. Every time you use the card, you take money directly from your bank account. If you overdraw your bank account you will get a penalty fee. This penalty is a risk you might not want to take with the debit card. On the other hand, you will not be able to carry over the debt from month-to-month, which means you won’t end up paying interest like you might with a credit card.

Unlike the debit card, the credit card can be used to accumulate a balance that will be shown when you get your monthly statement. Then you have a couple of weeks to pay the bill. This is true credit. If managed properly, this can help build a good credit history. But you have a problem if you can't pay off the balance when the statement comes.

My recommendation is to use a "credit" card unless you don't trust yourself to pay off the statement balance every month.

Let's assume you want to have a credit card — just one card, that's all. What card should you choose?

• You don’t want a card that is limited to only one store, like many department store cards are. You want a card that has the widest acceptance possible.
• If you are certain to pay off the balance every month without fail, you don' t care what the annual percentage rate (APR) interest rate is because you will never pay the interest anyway.
• Look for a card that does not have an annual fee. Why pay a fee if you don't have to?
• Look for a card that offers rewards or bonus points when you use the card. On the other hand you might want to stay away from any incentive to use the card if you are trying to stop using the card at all. But some cards let you collect actual cash for using the card — maybe $1 for every $100. This shouldn't amount to a lot of money if you are trying to NOT use your card, but eventually it may be worth having this feature.
• Find a credit card that will let you set up automatic payments for the full statement amount from your bank account on the due date for the statement. This will help you avoid late-payment fees, but you MUST make sure there is enough money in your bank account to cover the payment.

Remember to use the card correctly. By that, I mean you must be aware that you are spending money every time you charge a purchase to your card. Keep track of how much you are spending and make sure you have the money available to pay the statement balance every month. While the card is called a CREDIT card, you should never use it to get a cash advance. When you get a cash advance using your credit card it is very different from what happens when you purchase something such as airline tickets. Cash advances encounter different rules, different interest rates, and fees for each cash advance.

Rather than cut up all your credit cards, I recommend that you cut up and stop using credit on all cards but one. If you don't trust yourself to use the card correctly, don't carry the card with you except when you need it for those occasions when ONLY a credit card will complete the transaction. The card you have should be a card that doesn't cost you money to have, doesn't cost you money to use, and is only used when you need to use a card to make the transaction. And just because you have a credit card doesn't mean you have to use it at all. But there are situations when a credit card is the only reasonable way to make a purchase.

James W. Stone
Copyright 2009, James W. Stone, all rights reserved worldwide