Just DON"T do it! -- how to use credit cards properly

http://www.bichons.btinternet.co.uk/bichon.htm

If You Find Yourself in a Hole,

Stop Digging!

(Will Rogers)

In celebration of the busiest shopping day of the year, I thought we might talk a bit about credit cards. I hope I am not the first to break it to you but credit cards are NOT free money! Here are some “fun” facts about college students and credit cards from a Nellie Mae report:

• 76% of undergraduates in 2004 began the school year with credit cards; 56% reported obtaining their first card at the age of 18.
• The average outstanding balance on undergraduate credit cards was $2,169.
• 21% report paying off all cards each month; 44% say they make more than the minimum payment but generally carry forward a balance; 11% say they make less than the minimum required payment each month. [1]

While I cringe at the average balance and the high percentage of students that don’t pay off their card each month, I need to remind myself that reality is probably even worse than this. These statistics are just for students applying for student loans. The statistics on the general population would probably show higher balances and poorer repayment patterns.

Carrying a balance on a credit card is one of the easiest ways to ensure that you never achieve financial independence. Paying only the minimum balance or less will mean that you will always be paying the highest rates. Funny how no one told you this as all those offers for credit cards were rolling in. While credit cards can be a wonderful thing, the sad fact is that too many young adults have to learn a painful lesson before they properly manage their credit cards. Take heart, however. By absorbing this lesson early in your credit life, you will be way ahead in the game. Many Americans never learn this lesson and that is why they continue to work for their money rather than have their money work for them.

In a later post, I will discuss how you can work yourself out of high credit card debt. The lesson for today is just “stop digging the hole any deeper.” If you can’t pay off the balance on your card, don’t use it again until the balance is paid in full. You really don’t have to do any fancy budgeting. Sure this may mean that you have to wait to buy stuff but delayed gratification isn’t all bad. As shown in the famous marshmallow test, the ability to wait has a positive impact on where you end up in life. http://ezinearticles.com/?Delayed-Gratification-and-Money-(or,-Marshmallows-and-Your-Financial-Health)&id=237818 As Morgan James notes “When you go to spend your money, think about the Stanford Marshmallow Test. Then think about how many marshmallows you could buy if you delayed your gratification.”

In my opinion credit cards are not about buying things before their time. Card credits should be paid off in full each month. So why use them you ask? The primary benefits of credit cards are that they:

1. Help you establish credit.
2. Allow you to take advantage of specials (e.g., airline miles, cash-back).
3. May provide insurance/protection for your purchases.
4. Provide a tracking of your purchases.
   
   
   [1] http://www.nelliemae.org/library/research_12.html