The Do’s and Don’ts of Credit Cards
If you own and use a credit card, chances are you have recently made one of the following decisions. You either are aware of the extreme amount of negativity recently associated with credit cards covering everything from spiraling debt loads to identity theft and you have decided to cut up all of your credit cards or you are aware of the concerns and you have decided to use your cards anyway.
If you have decided to use your credit cards despite having heard and read about all of the negatives, then good for you. Just remember that moderation and awareness are the keys.
If you have been convinced that you should not use a credit card under any circumstances ever again, please consider that all concerns associated with credit card use stem from either the possibility of accumulating ever-increasing, unmanageable, high interest debt or the possibility of being subject to some type of fraud through the use of your card(s).
Let’s first focus on the worries related to increasing your debt load. Clearly, there is a real temptation to live above your means when you are armed with the purchasing power of a credit card. Virtually all measurements of credit card debt indicate that it continues to rise both cumulatively and per household. The increases in debt are far outpacing wage increases. There is no doubt that many amongst us, perhaps even the majority of us, have gorged themselves on debt and, in the process, society has become largely numb to the size of our collective debt obligations.
Additionally, people are starting to use credit cards at an earlier age, which fuels the peer pressure element of the inclination to buy things that would otherwise be unaffordable. So, in many cases, young adults are already accustomed to both carrying debt and keeping up with the Jones’.
As individuals get used to carrying debt, it is only a matter of time before it gets easier to justify paying less of it off each month. The utility value of debt lessens over time because you have already enjoyed the benefit you derived from the purchase. It is natural to think about other needs and wants and to focus more on obtaining those things as opposed to figuring out how to fully pay for something you already have.
There are, however, several good habits and other positives that effectively counter the worry and concern related to unmanageable debt loads. This is where moderation is relevant and essential.
Fraud, whether it is identity theft or any other form of unauthorized access or use of your personal information, is also a very real and growing concern. As a member of today’s mainstream society, you are a potential fraud target every day and as technological abilities increase, you are arguably more of a target. While credit card fraud has received the lion’s share of media attention in recent months, the fact is that unlawful credit card access or usage is just one of the ways the bad guys can get you. In fact, we could fill an entire newsletter just outlining the many different types of financial fraud that exist. This is where awareness is absolutely critical.
Using your credit cards in moderation is not, in and of itself, the answer to eliminating the temptation to live above your means, but it is a great step in the right direction. The concept is a helpful way to develop the right mindset relative to handling debt. This is especially true when you consider that the question of debt is not one of “should you have it?” as much as it is “how much should you have?”
For the vast majority of us, debt is a way of life. Whether you have a mortgage payment or a rent payment, a car payment or a tuition payment, clothes and groceries to buy, utilities to pay for, or all of the above, you have debt obligations. The decisions you make about how much debt you should have and when you incur debt will help to determine how successful you will be at managing your debt.
The moderate and timely use of a credit card can actually help you to manage how and when you take on debt. Credit cards can be a useful cash management tool when you use them responsibly and with full knowledge of the terms and conditions attached to each card, such as the grace period and the billing cycle. Using a credit card in this manner versus being solely reliant on credit to make ends meet also ensures that you keep your options open so that if you do experience an emergency or an otherwise unforeseen circumstance, you will have open line of credit to draw on.
Most credit cards include insurance and services that give you the ability to dispute amounts that show up on your statement if you feel they are inaccurate. These services are often available to you at no cost and can be very valuable if you have been overcharged or erroneously charged by a retailer or service provider.
Many credit cards are now tailored for specific purposes. Many offer a rewards program. Some offer fixed interest rates. Still others are designed for student use. Making the conscious decision to choose a card or cards that are best suited for you and your needs will also help you to identify the specific ways and times you will use the card, which will help you to moderate the use of the card.
Developing good credit card habits and/or reversing bad credit card habits are certainly not easy. Committing to responsible credit card use requires a huge amount of self-discipline in the face of endless temptations and choices. It will also require you to be more involved in your own finances and to take on more accountability for your actions and what you know and don’t know. All of the work will be worth it, however, and the gratification you will achieve by developing a plan and sticking to it will demonstrate just how ‘worth it’ it will be. If done properly, you will have more control over your life and less stress related to finances and you will still have the ability to treat yourself when needed.
As indicated earlier, developing your own personal awareness and knowledge is also vitally important when it comes to the proactive things you can do to mitigate your risk of being a fraud victim. Unfortunately, the increased risks of fraud via our electronic transactions are a by-product of the world we live in today. Despite the massive amount of resource being devoted to combating it, our increasing reliance on technology virtually guarantees that these risks will not be going away soon and will, in fact, likely get worse, but the news isn’t all bad.
Please remember that, in most cases, your liability as a fraud victim is minimal and that fraud detection software has also advanced and become much more effective at identifying fraud in earlier stages. You can reduce your risks even further through your own preventative practices and common sense. Again, if you commit yourself to developing an understanding of good protective measures that you can use when transacting your personal business, you will reap the benefits and advantages reserved only for those with the knowledge and control of their own finances.
There are risks associated with everything that we do. However, most of these risks, such as the ones related to the use of credit cards, are very manageable and should not prevent you from enjoying all of the benefits while learning to minimize the areas of concern and worry. Here are some helpful things to remember when considering the positives and negatives of credit cards…
Do
- Selectively choose credit card(s) that are specifically designed for your needs
- Understand the value and term of the grace period
- Understand the billing cycle and all other terms of use
- Understand your interest rate and all fees
- Set a monthly spending limit that fits within your budget and stick to it
- Use cash or a debit card when possible to reduce your reliance on credit
- Expect the unexpected
- Read your monthly statement
- Pay your bills on time and build good credit history
- Secure the information you need
- Shred or otherwise responsibly discard the information you do not need
- Share your credit card information only on a ‘need to know” basis
Do Not
- Accept every credit card offer you receive
- Use credit cards as your sole method of purchasing
- Let anyone else use your credit card
- Maximize your balances without a back-up plan
- Confuse your needs with your wants
- Forget to treat yourself as often as possible when you reach your goals
And, don’t forget, members of the Credit Union enjoy free and confidential Credit Counseling and Financial Planning through our Financial Planning and Education Center. We are here to assist you every step of the way.
Scott Arney
Chief Executive Officer
Chicago Patrolmen’s Federal Credit Union
