Jeffrey Strain takes a look at the pitfalls which can occur if you don' pay off your credit card debt each month



Virtually all projects concerning dams list controlling river water levels downstream to avoid floods as a primary reason for their creation. A funny thing, however, seems to happen with many of these projects once they are completed. Water levels behind the dam are frequently kept at high levels for hydroelectric production, as well as for recreational activities which are created by the newly formed lake. If a large population gravitates around the dam, the water is often needed for plumbing and drinking. Some dam water levels are kept at 70% or more of capacity.

Eventually a heavy rain comes and the dam quickly fills to capacity, forcing the operators to release water downstream or face the possibility of collapse. The families downstream find themselves and their houses underwater.

A similar sequence took place with my sister and her credit card. She applied for her card because she felt it would be helpful during an emergency. Once she had it, however, she found it was an easy and convenient way to pay for everyday expenses when she didn't have enough cash on hand. This continued until the credit card she applied for in order to protect herself in case of emergencies had in itself created an emergency debt situation.

Credit cards can be a fantastic deal or a terrible burden depending on how you use them. They're great if you have the discipline to pay off the card's balance every month because, in essence, you are receiving an interest-free loan from the time you make your purchase until your credit card bill arrives. Some companies allow you to earn points or credits toward a variety of goods and services for every JY100 you spend using their card. With these services, you can actually earn money by using a credit card as long as you pay off your balance each month.

Credit card companies can afford to give you interest-free loans in addition to other services for two reasons. First, each time you make a purchase with a credit card, the store where you buy the item must pay the credit card company anywhere from 3% to 7% of the price charged. The second way credit card companies make money is by "lending" (at astronomical rates) money to the people who fail to pay off their balance each month.

With credit card interest rates as high as 20%, a credit card loan is one of the most expensive loans you can receive. Since most companies allow customers to pay only a small portion of the monthly outstanding balance, this entices many users to get further into debt.

There are a few questions you should ask yourself regarding your current credit card use. Do you have outstanding monthly balances on more than one credit card debt? Have you only been making the minimum monthly payment on your card? Have you had debt on your credit card for more than three consecutive months? If your answer to any of these questions is "yes," then your card is probably more of a liability to your financial well being than an asset, and you should consider canceling it.

Try restricting your use to purchasing tangible items that you will keep. Financial planners say most people get into debt trouble when they use credit cards for purchasing meals, drinks and other consumable items. It's easy to forget these purchases since they no longer exist after purchase, and this makes keeping track of how much you've spent on credit difficult. By abiding by this simple rule, most people will keep themselves from falling into credit card debt.

For those who already find themselves in debt, you might want to consider the following steps. First, if you have extra cash, you should immediately pay off your outstanding balance. It makes no sense to earn less than 1% from your bank while you're paying double digits to your credit card company.

If you don't have extra cash, try to get a loan from a regular financial institution and consolidate all your debt under one loan. A bank loan's interest rate should be much lower than your credit card rate.

If a bank loan isn't possible, find out which credit card company charges the least amount of interest. Call that company and explain that you'd like to consolidate all your debt with them. If the company feels you'll be able to eventually pay off your debts, they'll work with you. Since there's a large difference in credit card interest rates, this can save you a significant amount in interest charges.

Once you have all your debt consolidated, don't forget to immediately destroy and cancel your other credit cards. Even for those who diligently pay off their balance each month, it makes little sense to have more than two credit cards at one time, and each of them should be from a different card company. Or you can follow the example of my sister. As she so often claims, "I'm probably the only person in the US who doesn't have a credit card, and I'm damn proud of it."