I want you to know that I use credit cards. Frankly, I love the convenience of them. When I don’t have time to run to the bank machine to grab some cash, it’s very comforting to know that I can slide my credit card out of my wallet and still buy whatever it that I need at the moment. Credit cards are a seductively easy way to replace cash when it comes to paying for everything legally available under the sun. There’s no annual fee to worry about and I even earn rewards for using my card. The cherry on my sundae is that I earn points towards free groceries – score!
The only negative that I’ve been able to associate with credit cards is the manner in which they facilitate debt problems. In other words, they make it ever-so-easy to get caught in the debt trap. See, when the bank issues you a credit card, the bank sets a limit on how much you can spend. And when you get close to that limit, the banks will increase limit so that you can continue to buy-buy-buy. From what I’ve observed with my own credit cards and the credit lines of others in my circle, the limit that is assigned to your card is completely and utterly divorced from the amount of disposable income that you have each month with which to pay off your credit card balance when the bill comes due. I used to have a $9,000 limit on one of my cards! I can assure you that I do have $9,000 each month that can be put towards my credit card.
Credit cards are here to stay. Let’s face it – society is not moving en masse back towards cash. There are the diehards who only use cash, and their numbers are dwindling. The last time I was at the airport, I noticed that passengers must use a credit or debit card to pay for their baggage fees. Excuse me? How is it possible that the words “Legal Tender” don’t apply at the airport?
The cornucopia of credit cards is not going to disappear anytime soon, but that doesn’t mean that you have to pay interest for the privilege of using them. Use your credit card as much as you want, but ensure that it is paid off in full by the due date. There are multiple ways to do this.
There’s the Traditional Method: the statement arrives, you see the balance, you pay the balance in full. This method is old-school. It’s incredibly effective. I don’t know of a single person who has been charged a penny in interest by paying their credit card balance in full before the due date. The banks lend you money via your credit card, then they ask to be re-paid if you use it. When the bill comes in, you repay the bank their money. Everyone’s happy and you get to do it again the following month. The Traditional Method works like a charm.
There’s my Obsessive Compulsive Method. I use my card. I check my account online. When the charge is posted, then I know that I will get the points for my purchase. I then go to my bank account and make an online payment for the charge in full. This method ensures that my credit card statement shows a balance of $0.00 by the time it’s sent to me. The OCM is a bit more time-consuming but it ensures that I don’t forget to pay my bill due to other stuff going on in my life. I have the satisfaction of knowing that all of my charges are paid off before the statement is issued – there are no debts hanging over my head.
Very recently, I learned about a third method – the Disposable Income Method. It involves pre-determining how much money from your paycheque to allocate to your credit card each time you are paid. You then tell your credit card company to set your credit card limit at this amount. You also tell them to freeze your credit limit, which means that they cannot raise your limit unless you ask them to. Then you use your card in the normal course and you pay off your credit card in full from each paycheque. For example, if you know that you can pay $1000 to your credit card account from your paycheque, then you arrange for the limit on your card to be $1000. When you get paid, you pay $1000 to your credit card. You credit card bill gets paid in full and you never carry a balance, which means that you’re not paying interest to your credit card company.
This third method has many benefits.
One – You never spend more than you can pay off in one paycheque. I will venture to say that most people with five-figure credit limits are not in a position to pay off their five-figure balances in full each month. This is why they carry a credit card balance and why they pay interest on their credit card balances.
Two – You will build your credit history quickly. There will be a solid record of you borrowing money on your credit card and paying it back promptly.
Three – You can still collect point or airmiles or free food, or whatever benefit it is that you card offers. You can still spend money however you want to, just like you did before. However, you’ve taken the very adult step of ensuring that you’ve prevented yourself from spending more money than your budget can handle.
Four – If your credit card is used fraudulently, then the damage that is inflicted is limited to a relatively small amount of money, i.e. the pre-determined amount that you can pay from your paycheque. The criminals cannot go hog wild with your card.
And if you’re already in debt, the answer is to stop using your cards. With rates pushing 30%, there’s no way that you can get yourself out of debt while still accruing interest charges on your credit cards. And if you’re paying 30%, then you might as well light your money on fire for all the good that it’s doing you. Paying interest is giving money away to the bank. That money should be in your pocket, not theirs!
You’ll need to go on a cash diet, while making payments to your credit card. Pick an amount – higher is better – and pay that amount to your credit card every single month until your card is paid off. Do not make any charges on your card! This means, you stop all auto-pays on your credit card. Why? Auto-pays are new charges, against which interest will be charged until you’ve paid off your debt. You will pay for your life with cash until you get out of debt. And if you have more than one credit card, you will continue this process until all of them have balances of zero. Check out the Snowball Method for detailed instructions on how to get out of credit card debt.
Once you’re out of debt, you won’t be paying interest to the bank anymore. You can use your credit cards again, but only if you are committed to one of the three payment methods.
All three of these methods work to keep you from paying interest on your credit cards. Pick one of the three methods outline above – all equally effective – to ensure that you don’t pay any interest to the banks. You can even combine them if you’d like. By following any or all of these three methods, you’ll pay for what you’ve purchase and not a penny more!