Play It Safe: Give Yourself Some Credit
When not used properly, credit cards can put consumers in a hole they can’t dig out of for many years. Interest payments alone can cripple a family’s budget. When used properly, however, they can help out in emergencies and help you establish a solid credit rating. Here are my suggestions for avoiding the credit traps that can hurt you and your family.
I am hereby announcing the Penny Pincher ” credit card.”
Here’s how to use it: Open a savings account at any bank. The amount of money deposited into this account is your ” credit limit.” For instance, let’s say you open your new account with a $200 deposit. Your credit limit is $200.
Begin making regular monthly deposits to increase your credit limit. Since this money is in a savings account, you will be earning interest on your ” credit limit.” No other credit card in existence pays YOU interest on your credit limit.
To make a purchase, simply withdraw the amount of the purchase from your savings account and pay cash. Record deposits, interest earned, items purchased and their cost in a ledger.
To repay the account, you have two options. With Payment Plan A, you’ll deposit enough money to replace the loan amount withdrawn within 30 days.
If you choose Payment Plan B, you can determine your payment plan based on your situation. For example, let’s say you borrowed $200 and want to pay the loan back in six months at 10 percent interest. Principle plus interest is $220. To pay it back in six months deposit $36.67 in your savings account each month. Remember, you will continue to earn interest from the bank on the remaining account balance. If your budget will allow, continue to make your regular deposit each month so that your credit limit continues to increase. You’ve probably got the idea by now - borrowing from yourself instead of someone else really pays off.
College kids and credit cards: Sixty percent of college students end up with plastic in their wallets before commencement. At least a third get their first credit card before entering college.
Consumer advocate Gerri Detweiler says, ” Most teens have never been taught now to manage credit cards, and the bills they run up in college can haunt them long after graduation.”
If college students could learn the importance of living within their means and making purchases with cash they have set aside, they could save thousands of dollars in interest over the years and increase their spending power immensely.
But if your college student does decide to get a credit card, I recommend Detweiler’s audiotape, ” Smart Credit Strategies for College Students” (Good Advice Press, 1-800-255-0899, $15.95 postpaid). If you don’t think your student will listen to it, buy yourself a copy and slip bits and pieces into letters and phone conversations.
Detweiler explains how to avoid the hype that’s already put millions of Americans in debt ” up to their eyeballs.”
She warns students, and anyone else for that matter, that by getting caught in the minimum payment trap, they’ll be obligating themselves to years of expensive payments, long after they’ve graduated. By continuing to buy on credit but only making the minimum payment required, they’ll never pay off the balance, thereby creating perpetual credit card debt.
For anyone working toward financial freedom from credit card debt, there’s The Penny Pincher Credit Card on page 3 of the May ‘95 issue of my newsletter to cut out and carry in your wallet. The card serves as a reminder to deposit money into your savings account regularly and to borrow from yourself. You can order the May issue by sending $2 to The Penny Pincher with your request. Or you can order a laminated card and a Penny Pincher Passport to Financial Freedom, a record keeping booklet with complete payment and interest chart, for $5 for the address below.
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