FOOL SCHOOL
Control Your Credit Card Spending

December 13, 2002

By Jane Mack (TMFJane)

There are very few things in life that can be both a godsend and a curse, but the ubiquitous credit card is definitely one of them! A godsend when you're desperate for those Bjorn Again tickets and pay day isn't for another three days, but a curse if it means you've maxed it out and can only afford to pay off a tiny amount each month.

As all Fools know, the only way to properly manage your credit card is to pay it off in full each month. In fact, cards can even be a very good thing. If you use them sensibly, you can have the advantage of Free Money for as much as six weeks, and you don't pay a sou for the privilege!

But it's very easy to get 'conned' by special offers such as low interest rates for six months, or the lack of an annual fee, only to find that, sooner or later, the former shoots up and the latter puts in an unexpected appearance. Except you didn't realise it because you didn't read the small print when you first signed up, nor did you read the leaflet that arrived with your latest credit card bill announcing such changes. It went straight into the bin, didn't it?

Credit card companies would say that's your problem, of course. And in theory, it is. But there's nothing to stop them heading your bill with "INCIDENTALLY, WE'VE NOW DOUBLED YOUR INTEREST RATE" or "SURPRISE! SURPRISE! ANNUAL CHARGES NOW APPLICABLE".

Hmmm! I wonder why they don't do that?

No surprises there; it's because their entire reason for existence is to make money out of you. And they will if you let them.

The fact is, when you use your credit or store card, you're borrowing money -- usually at a rather top-heavy rate of interest with some store cards charging up to 30%! But there's a tendency for people not to think about it in those terms. It's far too easy to see your £1,000 credit limit as free spending money. No! No! No! It isn't!

It was probably the profligate use of credit cards that got you into trouble in the first place but there are ways of using them to actually sort out your debt problems -- if you're sensible about it! After all, if you've got debts, they might as well be cheap ones!

How many cards have you got?

For some reason, credits cards seem to proliferate like wire coathangers. You happily start off with just the one card when you get your first real job and then suddenly find you've got 17 of them in your wallet. And you only turned your back for two seconds!

Well, I hesitate to suggest getting yet another one, but it might be an option worth thinking about for the following reasons. Many credit card companies, in a bid to get your custom, are offering very low rates of interest if you transfer your debts from other cards. Sometimes the low rate is only for six months but there are some that will remain low for the life of the debt. These are obviously the best ones to go for as you won't have to switch cards on a regular basis, but even those offering low rates for short periods can be of use if you're prepared to transfer the debt to a new card when the six months is up.

(As an aside, here's a very useful post from one of our Fools who decided to tackle his own credit card company when he received a letter suddenly upping the interest rate)

There are also companies offering a cash-back option if you transfer your debts, and these can also be useful as a means of reducing your borrowings. In fact, some of our Fools on the Credit Card Discussion Board are using cash-back cards as a means of acquiring Free Money even if they're not in debt! They're cheerfully playing the system and having a good time doing it! It's amazing how much pleasure one can get from playing the financial institutions at their own game.

It is, of course, inadvisable to take this route if you're usually at the bottom of the class when it comes to handling money -- but it's certainly sensible to use what's on offer to your advantage. Quite simply, if you've borrowed money on a high-interest credit card, then transfer the debt to a low-interest card so that it costs you less to pay it off.

It goes without saying that you MUST pay it off! Getting yet another credit card doesn't give you a licence to carry on spending money! Remember that you are the Master and money is your Servant. So make sure you stay in control and use the system to get yourself free of your debts.

If you're worried that your new card will prove too much in the way of temptation then try the following course of action:

Take one small plastic container with lid. Fill it with water. Float one single credit card -- the one that charges the lowest interest rate, of course -- on the water. Sink it with a small but carefully selected stone from the garden and put the lid on. Then stick it in the freezer and leave it to sulk among the fish fingers and oven ready chips.

It'll be there if you really, really need it. And, if the day comes when you truly think there's no other alternative, this method will give you some time to contemplate whether you absolutely have to use it -- because you'll have to wait while it defrosts! (No cheating -- the microwave will nuke the magnetic strip!)

As for the rest of your cards -- the high-interest ones that you've just abandoned because you are NEVER going to use them again, are you? -- just get the scissors out and cut them up!

Or you could, as financial guru, Alvin Hall, recommends, set fire to them in the back garden while playing 'Burn, Baby, Burn' very loudly on the stereo. (Have a bit of a boogie while you're at it)

Either course of action has two benefits: it removes the temptation to spend, and it means you'll have more room in your wallet for the real money that will come your way once you've cleared your debts!

Now, isn't that a cheery thought?

For more on tackling debt see our Get Out Of Debt centre.