Credit Card Management
My Finance Consulting:
What are credit cards?
Why prudent management of credit cards?
Credit cards are a necessity nowadays. Hardly anyone in America,
Europe and many developing countries can function on a daily basis
without credit cards and there are many good reasons for this.
Credit cards provide the user with the ease of having access to a
means of payment for goods and services on demand. In this way a
credit card is a truly flexible instrument for payment of goods and
services. If effectively becomes money on demand.
In addition, the availability of credit cards implies enhanced personal
security for its users. There is little need for users to move about with
thousands of dollars on their person hence minimizing their personal
risk - both their lives and to theft.
But the down-side of credit cards is that they provide the user with a
sense of limitless availability of money, provided he or she can make
the minimum monthly payments. What most people do not understand
is that when they are only capable of paying their minimum monthly
payments then they would have become effectively locked into a
mortgage-type long-term repayment schedule and it could literally take
10, 20, 30 years and more before paying off their credit card debt.
Moreover, the interest rates on credit cards, while variable tend to be
generally higher than a personal loan that can be negotiated upon
demand with a bank or other lending institution.
Many of the responsible banks nowadays inform their customers of the
implications of poor credit card management and the resulting
uncontrollable credit card debt than usually ensues. Banks and other
financial institutions will do better if they educate customers on the
potential downside of credit cards and encourage them to keep
spending within a safe range. The golden rule is to always ensure that
you can pay off your entire credit card balance on a monthly basis.
Of course, this is not always possible. What credit card users should do
however is to ensure that at any point in time they can completely repay
their credit cards within 3 to 6 months at the outside. More importantly,
they need to know what their real credit limit really is and to recognize
when such credit limit has been reached.
Europe and many developing countries can function on a daily basis
without credit cards and there are many good reasons for this.
Credit cards provide the user with the ease of having access to a
means of payment for goods and services on demand. In this way a
credit card is a truly flexible instrument for payment of goods and
services. If effectively becomes money on demand.
In addition, the availability of credit cards implies enhanced personal
security for its users. There is little need for users to move about with
thousands of dollars on their person hence minimizing their personal
risk - both their lives and to theft.
But the down-side of credit cards is that they provide the user with a
sense of limitless availability of money, provided he or she can make
the minimum monthly payments. What most people do not understand
is that when they are only capable of paying their minimum monthly
payments then they would have become effectively locked into a
mortgage-type long-term repayment schedule and it could literally take
10, 20, 30 years and more before paying off their credit card debt.
Moreover, the interest rates on credit cards, while variable tend to be
generally higher than a personal loan that can be negotiated upon
demand with a bank or other lending institution.
Many of the responsible banks nowadays inform their customers of the
implications of poor credit card management and the resulting
uncontrollable credit card debt than usually ensues. Banks and other
financial institutions will do better if they educate customers on the
potential downside of credit cards and encourage them to keep
spending within a safe range. The golden rule is to always ensure that
you can pay off your entire credit card balance on a monthly basis.
Of course, this is not always possible. What credit card users should do
however is to ensure that at any point in time they can completely repay
their credit cards within 3 to 6 months at the outside. More importantly,
they need to know what their real credit limit really is and to recognize
when such credit limit has been reached.
A credit card is an instrument issued by a bank or other financial
institution with which payments can be made for goods and
services. Since the modern credit card industry came into being in
the 1950s a number of prominent issuers have emerged including:
American Express, Diners Club, Visa, MasterCard, and Discover to
name a few.
Credit cards used to be a status symbol in the 1950s when they first
came to being. The early issuers like Diners Club and American
Express made their money on annual membership fees as their
customers were expected to pay back within one to two months. As
such, only an affluent few were credit card holders in those days.
About a decade later banks began offering what is known as
revolving debt credit cards, which allows customers to stretch out
their payments over a very long time horizon. In this new approach
the card issuing institutions make their money primarily on interest
payments.
institution with which payments can be made for goods and
services. Since the modern credit card industry came into being in
the 1950s a number of prominent issuers have emerged including:
American Express, Diners Club, Visa, MasterCard, and Discover to
name a few.
Credit cards used to be a status symbol in the 1950s when they first
came to being. The early issuers like Diners Club and American
Express made their money on annual membership fees as their
customers were expected to pay back within one to two months. As
such, only an affluent few were credit card holders in those days.
About a decade later banks began offering what is known as
revolving debt credit cards, which allows customers to stretch out
their payments over a very long time horizon. In this new approach
the card issuing institutions make their money primarily on interest
payments.
Interest rates on credit cards
When choosing a credit card, the number one factor to consider is the
interest rate. Your credit card interest rate tells you how much money you
will have to pay back or the "opportunity cost" of having access to money
today. So, naturally high interest rates or APR imply relatively large
paybacks, while low APR implies relatively low paybacks.
It is common nowadays to find credit card companies that charge up to
20% APR more than twice the interest rate on short-term loans for a
bank. Suppose you had $5,000 in credit and your APR is 20% then in
one year you would be paying back $1,000 in interest only! That is
assuming you do not incur additional credit card debt and there are no
late payment fees. But many credit card companies charge a late
payment fee of anywhere from $25 to $50, so if you are late in paying
four times for the year you need to add another $100 to $200 in fees.
interest rate. Your credit card interest rate tells you how much money you
will have to pay back or the "opportunity cost" of having access to money
today. So, naturally high interest rates or APR imply relatively large
paybacks, while low APR implies relatively low paybacks.
It is common nowadays to find credit card companies that charge up to
20% APR more than twice the interest rate on short-term loans for a
bank. Suppose you had $5,000 in credit and your APR is 20% then in
one year you would be paying back $1,000 in interest only! That is
assuming you do not incur additional credit card debt and there are no
late payment fees. But many credit card companies charge a late
payment fee of anywhere from $25 to $50, so if you are late in paying
four times for the year you need to add another $100 to $200 in fees.
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Investing
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Mortgages
Mutual Funds
Real Estate
Reviews
Savings
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Personal Finance:
Taking financial control and credit cards
By now, it will be obvious that you will not be in total financial control if
you have large outstanding credit card balances, so the best thing to do
is to eliminate your credit card debt as quickly as possible. But, before
you can eliminate your credit card debt you need money to finance it.
Therefore, it is suggested that you first develop a savings habit as is
discussed on our financial control page, then you use some of your
savings to eliminate your credit card debt.
Sticking to the minimum payments suggested by your bank or credit
card company will result in a protracted period of repayments no
different from that in repaying a mortgage. So you need to increase your
monthly payments significantly above the stated minimum monthly
balance. The extent to which your payments exceed the minimum
monthly balance depends on your capacity but you should aim to pay at
least $250 to $300 more than the minimum monthly balance if you wish
to drastically reduce the repayment period and amount of interest paid.
So, to summarize if you want to take control of your personal finances
you need to take control of credit card management. Interest on credit
card debt is significantly higher than that on other short-term loans, so
always be careful about the amount of credit card debt you are incurring.
More importantly, you should consider incurring credit card debt
primarily towards business activity, which will bring you a return.
Personal expenses should be disciplined to be paid off in the same
month of incurring the charge and certainly not beyond three to six
months. If you follow this simple rule of thumb you will be on your way to
taking greater control of your personal finances.
you have large outstanding credit card balances, so the best thing to do
is to eliminate your credit card debt as quickly as possible. But, before
you can eliminate your credit card debt you need money to finance it.
Therefore, it is suggested that you first develop a savings habit as is
discussed on our financial control page, then you use some of your
savings to eliminate your credit card debt.
Sticking to the minimum payments suggested by your bank or credit
card company will result in a protracted period of repayments no
different from that in repaying a mortgage. So you need to increase your
monthly payments significantly above the stated minimum monthly
balance. The extent to which your payments exceed the minimum
monthly balance depends on your capacity but you should aim to pay at
least $250 to $300 more than the minimum monthly balance if you wish
to drastically reduce the repayment period and amount of interest paid.
So, to summarize if you want to take control of your personal finances
you need to take control of credit card management. Interest on credit
card debt is significantly higher than that on other short-term loans, so
always be careful about the amount of credit card debt you are incurring.
More importantly, you should consider incurring credit card debt
primarily towards business activity, which will bring you a return.
Personal expenses should be disciplined to be paid off in the same
month of incurring the charge and certainly not beyond three to six
months. If you follow this simple rule of thumb you will be on your way to
taking greater control of your personal finances.
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