Tips To Reduce Credit Card Debt Problems

by Tax Guy - Burlington Accountant on December 3, 2008 Print This Post Print This Post

The Moneygardener recently published an article defending the assertion that credit cards are a tool for managing discretionary spending and encouraging saving.  Three reasons why credit cards are excellent vehicles for getting ahead financially are presented:

  • Credit cards have zero transaction costs.
  • Credit cards are widely accepted and convenient to use and reduces the amount of cash lying around (and therefore spent).
  • Credit cards have excellent tracking that you simply do not have with cash.
  • Credit cards offer a “float” which means you can save your cash and earn interest and pay your credit card bill one a month.

The caveat is that a credit card with no annual fee is obtained and that the monthly bill must be paid in full when due to avoid the higher interest on the credit card.

So What?

You may by asking yourself why bother? You may have a checking account with unlimited free transactions and may not see the added benefit of using credit cards. Here is a short list of what the true benefits are:

1. Points. If you can get a credit card with no annual fee and a nice points program there are benefits available. Now points programs are not the be all and end all of selecting a credit card. Keep in mind that often credit cards that have rewards programs will have an annual fee. With that in mind, a no annual fee card is of primary importance to save money. That being said, my wife and I have a no annual fee credit card with rewards points and the year before last we had Christmas on points!

2. Earn interest. You can invest your pay in very short term vehicles until you need to pay it out. The longer you can save your money the better off you are. Assume you are paid $5,000 on the last day of every month, that you have a monthly mortgage payment of $1,000 that comes out on the 15th of the month as well as an automatic savings sweep of $500 at the same time. The rest of your bills are paid directly from your credit card.

If you have a credit card limit of $3,500 and you also pay that bill on the15th.
What you have done is left $5,000 in your account for an average of 15 days amonth. If you sweep the funds to a high yield savings account paying say 3.25% per year, means you are earning $0.445 per day in interest, or earning anadditional pre-tax interest income of roughly $81.

The amount is small, but for the effort it can be worth it especially of you canautomate your transfers on-line.

3. Security. Lost credit cards can be replaced easily. Cash is almost always gone for good.

4. Purchase protection. When you make a purchase on many credit cards you are offered purchase protection.

Tips To Reduce Your Exposure

If you find yourself the impulsive type of personality here are some tips you can use to reduce the likelihood you’ll fail to pay your bill in full or run into trouble.

1.) Reduce the number of credit cards you have. Do you really need two, three, orfour MasterCard’s and a plethora of department store charge cards? Do youactually use them all? Consider reducing the number of credit cards you have toone or two. Ideally, you could have one card for all of your regular”discretionary” purchases and another card for major purchases.

Having too many credit cards may expose your credit rating and can affectyour borrowing capacity.

2.)  Consider reducing the limit on your discretionary purchase card.  The limit you choose should reflect the amount of available cash you would normally spend on discretionary items.

3.)  Tell your credit card provider to not annually increase your limit.  This does not mean you’ll never be able to increase your limit, but rather you must ask to have your limit increased.

4.)  Credit cards offer purchase protection and may offer extended warranties to their cardholders.  If you make periodic “big ticket” purchases, you may want to have another card with a higher limit to allow you to make these purchases. If you find yourself tempted or are the type to make purchases on impulse, leave this card at home or put it in your safe deposit box at the bank. If you make it not easily accessible then the temptation to make an impulse buy is reduced. But remember not to make a purchase unless you can pay the balance in full when it is due.

The trick is to put yourself in control by limiting your available credit to no more than what you would have for cash and thus ensuring you are always in a position to pay your bill in full when it is due.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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