Credit Card Trap

September 2001
by Jeff Wyatt

Credit may be important to your business, but not having credit card debt may be more important.

I subscribe to an Internet service called Refdesk Link of the Day (www.refdesk.com) which sends me daily e-mails containing sites of interest. Today they sent me an article entitled, "The Truth About Credit" that I want to pass along to you.

The article is not necessarily anti-credit card, but alerts the reader to the tricky marketing ploys engaged in by the credit card companies. The reason this article caught my eye was because I have a so-called Platinum card with a 7.99% interest rate. Last July I went on vacation and overlooked the payment, resulting in it being about two weeks late. When I got my bill this past week, the interest rate had been hiked to 18.99%. Obviously my card had a very short grace period. How likely is it that they will reduce my rate to the original 7.99% again?

Luckily, I have a low balance and I can pay it off and cancel the credit card. But what if I were carrying a large balance? I would have to go to the bank and get a second mortgage to pay off the credit card, or shop around for another credit card company offering a low interest rate and transfer my balance. The bottom line is that large credit card balances are just not a good financial strategy.

If you currently have a credit card balance on which you are making monthly minimum payments, it is possible that it will grow to become a large debt that will be very difficult to pay off. As a rule to thumb I would say that your monthly charges should not exceed your ability to pay them off to a zero balance each month. If the hot water heater needs replacing now, should you put it on your credit card?

I say no. Instead, go to your bank or credit union and arrange for a line of credit that is activated by overdrafting (withdrawing more money than is available) an account. A debit card that is associated with the account can then be used like a credit card; in essence, you would be creating a loan for yourself at about half the percentage of interest as a credit card, and could simultaneously avoid overdraft fees. (Contact your bank or credit union for more details.) The rates will be close to half A line of credit will result in resolution of your debt rather than simply servicing your credit card account (paying the interest and very little of the principle).

Planning ahead for small disasters is also a great way to avoid credit card debt. Make regular payments now into an emergency fund savings account that will provide cash to buy the new appliance and credit won't be an issue.

Credit cards are convenient. I can shop online and over the telephone. I am not saying that people shouldn't use them at all. In fact, a lot of our memberships and books are bought using credit cards. I am merely advising constraint when using a convenient but dangerous financial tool.

To read "The Truth About Credit," go to www.truthaboutcredit.org.