Most people have some debt: a car or student loan, mortgage, home equity line of credit. In and of itself, debt isn’t bad. Sometimes it’s necessary. Where you and I can get into trouble is when we let our debt get out of control. High credit card balances, late payments and calls from creditors can ensue if we’re not careful. Fortunately, there are steps we can take to get and keep our debt under control.
1) Understand and appreciate the real cost of credit.
When you pay for dinner or a new pair of pants with a credit card, what does it really cost you? One of the main reasons that people get in over their heads with debt is because they don’t stop to consider the real cost of credit. Unless you pay off your credit card balance every month, you’re paying more than the initial cost for that dinner or that pair of pants.
If you just make the minimum payments on your credit card, you could pay up to four times the actual cost of the items you charge! Imagine if you took that pair of pants to the cash register and the store clerk told you they cost $240 instead of $60! You probably wouldn’t buy them. Well, a $60 pair of pants bought with a credit card could end up costing you as much as $240 by the time you factor in the interest charges.
2) Understand how your brain works.
There’s something called the “psychology of credit” that affects us all and we need to be aware of it. The psychology is simple: because you’re just swiping a card instead of handing over cash, you feel like you’re saving money. You walk out of the store with the item of your choice and your cash is still in your pocket. It feels like a double-win. When the psychology of credit tempts you to pay with a credit card instead of cash, be aware of what’s happening. Remember that charging the item will potentially cost you more, not less.
3) Avoid the temptation.
Impulse purchases are what get most of us in trouble. Avoid the temptation to buy things you don’t need (with money you don’t have) by leaving your credit cards at home. If you’re feeling especially bold, you can cut them up, or shred them and throw them away. If you leave them at home, put them some place where they’re hard to get to. Try this – wet a washcloth, wrap your credit cards in it and put it in the freezer! Then, even when you’re tempted, your cards won’t be readily available.
4) Pay off your balance every month.
Making the commitment not to use credit cards is a good one, but we all know that emergencies arise. If you need to use your credit card for an unexpected car repair or some other unforeseen expense, pay it off in full when you receive your next statement.
5) Track your spending.
Tracking your spending can take some work, but it’s worth it! Get a small notebook and carry it with you. Every time you buy something, whether you pay with cash or credit, write it down in your notebook. And mark how you paid for it (cash or credit). Do this for at least two weeks, but preferably for a month. Then, review the entries in your notebook. You might be surprised to find that you spend more money on “impulse” or smaller items than you realize.
6) Control Your Impulses.
Don’t worry, this one isn’t as hard as it sounds! One impulse purchase can throw an entire budget planner out of whack. To avoid this, set some boundaries around impulse buys. For example, if you go into a clothing store to buy a belt, but while there you see a “must-have” dress, don’t buy the dress or the belt. Instead, leave the store and come back 20 or 30 minutes later. This “cooling off” period will make it easier for your to pass on the dress entirely.
Controlling your debt is possible. It isn’t always easy, but it is possible. And if you get off track a little bit, don’t give up. Just recommit to your decision and start again.
For more ideas on how to improve your financial health, check out Quizzle.com, where you’ll learn how to get out of debt faster and achieve your credit potential. And check out these other great money-saving articles: