How to Manage Credit Card Debt

Part II – How to Manage Credit Card Debt

25 Nov , 2015  


Few Things to know while managing credit card debt

As I pointed out in How to Manage Credit Card Debt: Part 1, having a credit card is often a double-edged sword and knowing how to use it in a strategic and beneficial way is a vital step in becoming financially independent. So, start managing your credit cards and credit card debt right now.

Hacker trying to steal credit card

The first thing you will want to sit down and think about is why you are using your credit cards. Is it because it is convenient? Is it because you are hoping to rack up reward points on airline miles?

Realistically, you should be using credit cards—first and foremost—for convenience’s sake. You should also weigh pros and cons of using a credit card on a regular basis. If you are paying horrendously high interest on a card, is it REALLY worth it to occasionally earn a small amount of cash back or points for flying? Not really. Besides you don’t receive any points till everything charged is paid by you. You don’t get any points on outstanding debt.

Another thing I recommend is that you develop a “mental calculator”. This built-in-your-brain calculator can help you to keep track of your credit card purchases.

For example, I bought some clothes for my children at a store in NYC since each piece of clothing was marked down 25%. I had already told myself that I was going to spend $3,000 that month. Before this purchase, I had already charged $2,500. The clothes were going to cost me $400. Therefore, I knew that this was going to be my final credit card purchase for the month.

Yet another way to control your credit card debt is to play a “trick” of sorts on yourself. Anytime you are tempted to buy something online or on TV (think “two money-back-guaranteed gadgets for the price of one”), remind yourself that if it was something that you really needed, you would most likely have bought it long ago. Then pick up a pen and write down the phone number that is flashing on your screen/the URL of the item you are tempted to buy.

Create a “Pending Folder”. It doesn’t matter if it is a literal paper folder or an electronic one. Wait two weeks and then just toss it out or delete it. The urge to buy those items will be long gone by that time.

Ready for one more piece of advice about credit cards? Here you go: Try to avoid using store credit cards.
Why? Because, not only are they more vulnerable to being hacked than bank-issued credit cards due to laxer security methods and policies, they also are tied to Big Data.

Big Data is not only your name and your address. It is everything you buy, sell or search for. It is everything about you and your shopping habits. Stores will use Big Data that is collected about your purchase habits and will try to entice you with special offers.

If you don’t believe me—and you really should believe me since my specialty is database—visit any search engine, type in my name and press “enter”. You will get more than 30 pages about my work with data over several decades. I have also written six best-selling books on databases and have been as a speaker to 37 countries, and on top of it multiple times to many of these 37 countries, as a speaker on database topics. By the way I also designed the FBI database to catch criminals. I know my stuff.

Anyway, the point is that your privacy is at stake here. And if there is no adequate security, there is no privacy because, truly, security and privacy walk hand-in-hand.

Walmart handles more than one million customer transactions per hour. Details of each of these are imported into databases that are estimated to contain more than 2.5 petabytes of data (a petabyte is 10 to the 15th power/1,000 terabytes). The more data a company has stored, the more of a target it becomes to hackers.

Recently, Target was data-attacked and millions upon millions of customers’ credit cards were compromised. Scary stuff. But the lesson to learn is to NOT use any store credit cards. I know I am repeating myself, but this is so important that it bears repeating. I also never allow my passwords to be saved on a website, no matter how annoying it may seem to constantly re-type them in manually. It is better to be safe than sorry on this front. I promise.

Business woman waorried about credit card debt

Here is one example of the implementation of Big Data:

Walmart kept track of what women purchased during each month of their pregnancy. A 17-year-old girl happened to buy some similar items and, as a result, she started to receive mail suggesting products that were geared towards pregnant women.  The store was able to do this because they had her home address on file since she had a Walmart credit card. She was able to intercept every piece of mail that was sent to her—except one.

That piece of mail ended up being opened by her father, who was livid that Walmart would dare send these offers to his daughter under the assumption that she was pregnant. He stormed into the store and yelled at the store manager. When he returned home, he asked his daughter why she had been receiving this type of mail.  She then had no choice but to confess that she was indeed pregnant.

Based on Big Data that was collected about this young woman’s purchases, Walmart was able to infer that she was pregnant and attempted to coax her into buying more pregnancy-related products.  This is, in a nutshell, “business analytics”.

This story illustrates my main point: Your privacy is out the door. Steer clear of store credit cards.

In addition, consider that the average US household credit card debt stands at $16,140, counting only those households carrying debt. Based on an analysis of Federal Reserve statistics and other government data, the average household owes $7,529 on their cards; looking only at indebted households, the average outstanding balance rises to $16,140.

As of October 2015

U.S. household consumer debt profile:
•    Average credit card debt: $16,140
•    Average mortgage debt: $155,361
•    Average student loan debt: $31,946

In total, American consumers owe:
•    $11.85 trillion in debt  (An increase of 1.7% from last year)
•    $890.9 billion in credit card debt
•    $8.17 trillion in mortgages
•    $1.19 trillion in student loans  (An increase of 7.1% from last year )

Now that you have some numerical proof to ponder, it seems as good a time as any to make a plan to start paying off your credit cards, even if this cuts into your savings. Having some extra emergency money is nice, obviously, but getting rid of your credit card debt will benefit you much more long-term. Here are a few reasons why:

  • You’ll save on interest payments. Almost all credit cards charge a much higher rate than what you’d earn on money stashed in a bank account. This means that the money you will save on credit card interest payments more than makes up for the small interest you were getting by keeping that money in a savings account.
  • Qualifying for financing should get easier. Besides boosting your FICO credit score (The most commonly used credit scoring algorithm in the U.S. is produced by the Fair Isaac Corp. FICO scores range from 300 to 850: the higher the score, the better.), your debt-to-income ratio will decrease. So, when you apply for a new loan, for a new home, car, etc. you will be in a better position to borrow the amount you need at a lower interest rate.
  • You’ll be better situated to save in the future. It might feel like you’re taking a step backward by using some of your savings to pay off credit card debt, but if you can get past the short-term pain, you’re actually making it easier to save in the future. Now, you can move some of the money you were using to pay down your credit card balance to savings instead.
  • Your state of mind will improve. Not having to think about coming up with huge credit card payments every month, in addition to all your other monthly expenses, will take a huge burden off your back, and make you sleep better. Just remember how good it feels when you don’t have to be in a “Worry” state. And don’t let that debt accumulate again.

Wake up ladies! You can eliminate your credit card debt by being financially savvy. Keep taking steps towards your financial independence!

Other Resources for you-

  1. How to avoid credit traps
  2. 6 Smart ways to use a credit card

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