This is the second installment in a mini-series from Ramit Sethi’s book, I Will Teach You to Be Rich. In case you missed the first post in this series, 3 Simple Steps Leading to Personal Wealth, be sure to check it out as well.
I struggled for a while with what to include in today’s post. There was a wealth of information in I Will Teach You to Be Rich, and it was an enjoyable read (how often can you say that about a personal finance book?), but I didn’t want to appear to be endorsing Ramit’s book since MoneyNing.com is an equal-opportunity promoter of all things related to personal finance. In the end, the section on credit cards won out because essentially, credit card debt is a very serious problem for many Americans, and probably quite a few others living outside the U.S.
According to the Federal Reserve’s Newsletter, the total U.S. consumer debt reached $2.5 trillion, with the total U.S. revolving debt (98% of which is made up of credit card debt) totaling $801 billion, as of December 2011. That’s a lot of people looking for a way to pay off those credit cards. You can win at beating the credit companies at their own games – and save money while improving your credit. Here’s what Ramit suggests:
- You need credit cards, but only 2-3 (not four like the average American). To help raise your credit score, you should keep two credit cards active. Inactive credit cards won’t help you, so use them on a regular basis, such as for paying for a reoccurring subscription or monthly payment. Your credit matters much more than saving money. As Ramit says, “Credit has a far greater impact on your finances than saving a few dollars a day on a cup of coffee.” David’s Note: Make no mistake. Both your credit profile and savings are important. When you are young, your credit may allow you to finance bigger purchases at a lower cost. But be disciplined enough and your savings will eventually become the biggest contributor to your path to financial independence.
- Pay off the TOTAL balance at the end of every month. This isn’t new advice, but it is solid advice.
- Set up automatic payments so you NEVER miss a credit card payment again. Ramit gives specific examples in the book on how a single late payment on one credit card can instantly drop your credit score by a hundred points! Add in the late fees and added interest and you’ll soon agree that you should avoid making credit card payments late for any reason. Ramit recommends setting up automatic payment through your checking account so that the entire balance is cleared on a set day every month.
- Never pay just the minimum payment due. Even chipping in an extra $20 a month will help drastically reduce the amount of interest you pay overall.
- If you can’t get a credit card because of your current credit history, try asking your local bank about getting a secured credit card, and moving up to a regular credit card with the same bank after a few months.
- Even when you carry a zero balance on your credit card, be sure to regularly ask for a limit increase. The more available credit your have with a zero balance, the better off your credit becomes.
- Don’t go hog wild. Open one new credit card account, then wait a year before opening another.
- Avoid retail credit cards like the plague – even if they promise to save you 20% of the purchases lying on the counter, don’t give in to the temptation. These cards often have awful terms and end up costing rather than saving you money.
The exception to these credit card “rules” is if you know you have little no control when it comes to spending. You know, those who will run up the balance and have trouble paying it off if they have a higher credit limit, or even own a credit card at all. But even then, you can always freeze your credit cards and still build your credit without using them.
If you know credit cards are dangerous for you financially, get rid of all cards and work on paying off what debt you have. Your best bet, in this case, may be to get a secured credit card from a bank that offers customers the option to turn off overdraft protection – meaning you can’t spend any more than you have in the secured account and won’t accrue any overdraft fees from over-spending.