Credit Cards Ain’t Your Friend

I mentioned earlier that I did not have a very clear idea about how money really works until a few years ago. You may be surprised, but it’s true, that I did not get to use a credit card until I finished my undergraduate degree and joined a graduate school. I was quite adamant and would not pay attention to any advice regarding money. So when I heard that credit card can help build my credit history, I filed an application for a credit card to my credit union without asking anyone for any advice. I did not even have the slightest idea what credit history is, how it works, and what steps should be taken to build a good credit history. I received the shiny plastic card within a week or so. But I was a little upset that the credit limit in it was a meager $500 and the APR about 15%.

Road to perdition

I started to use my new credit card to buy everything — every single thing that I needed to buy. I used to hate using cash and pity the ones who fumbled with cash in the counter. Cash was too cumbersome for me. But you cannot buy too many stuffs over and over against a credit card with a limit of $500. I applied for an American Express Blue card which too started off with $500 limit but it went up to about $16k in a two years period. After a few months, there was a huge lot of mails flowing in my mailbox everyday with numerous offers for credit cards with low introductory APR. Whenever I received such mails, I would think that it was time for another card, as if, it was a game of collecting cards! I’d even tease my friends by asking,’ Hey, I have these many credit cards, how many do you have?’ It went on and on. After several months, it became really difficult for me to keep track of all the expenses and I started missing the due dates. I’d just forget the due dates although my salary was enough to cover the minimum dues. Consequently my APRs started going up, and that was the time when I realized that credit cards may not be my friends. I already had a debt of over ten thousand in credit cards by then , but the offers for new cards still kept coming. I eagerly filled out and mailed the forms to get a new card with a lower rate; only this time they would not approve my application! “Hmmm, it’s time to pay off the debt then”. I started to pay as much as I could after each month making sure that I paid at least the minimum amount due. But I became really paranoid when I found that after a couple of months they increased my APRs all of a sudden even though I had not missed any due date. “Thery are just trying to take advantage of me!” I requested the creditors to lower the rate, but they wouldn’t listen to me: they were not ready to lower the APRs. I realized then finally that the credit cards are not my friend!

The redemption

The idea of getting married and making a family probably opened my eyes. I knew that I must pay what I owed. Based on an approximate monthly expense I sketched a rough payment plan which would enable me to get out of debt in another two years (I wanted to be debt-free before I graduate which would be another two years down the lane). Then in the next thirty days I cut all the extra expenses that I’d think earlier I could not live without — including the morning coffee in the nearby Starbucks on my way, lunch in the university cafeteria (surprisingly the cafeteria was more expensive than the off-campus restaurants), another coffee in the afternoon, and dinner at an expensive restaurant. I have never been really addicted to coffee, so giving up coffee was not a big deal. I started cooking at home at night, and eating the left-over during lunch next day. The whole process of cooking took a lot of time at first, but I soon learned how to cook a healthy food in a very short time. I also cut extra expenses in the grocery bills and stopped making unnecessary trips to the mall. At the end of the month I found that I reduced my expenses to less than half! That was a big achievement for me. I fine-tuned my payment plan based on that month’s experience.

The plan that I have been using is nothing very fancy, it just came out of common sense: pay off the one which is charging maximum interest. My main goal was to minimize the amount that I have to pay on top of what I originally borrowed (the interest). I heard about the ‘debt snowball’ method (paying off the lowest amount first), but it does not make sense to me. You may feel good about paying off one card fully, but that may cause you to pay extra money as interest at the end. So far I have paid three fourth of the total debt, and it will be over by another year and a half. Not only that, the card with the maximum interest rate has zero balance now. Yay!

I found it extremely useful to pay the alloted amount to the credit cards as soon as I get my pay check. Longer you delay, less money you have to pay the debt! I always pay the credit cards online, and I have enabled automatic payment of the minimum due on the third day of each month. At the beginning of each month I look carefully at my budget and decide how much money I’ll have in my hand to pay the debt after paying for necessary things and saving for my emergency fund (this is just a cross check for my plan). Then I calculate how much money I’ll have from that amount after paying the minimum dues (this is also just to check if the plan is OK), and then I change the amount to be payed to the card with maximum APR to include that extra money.

I stopped using credit cards completely. I pay by a debit card issued by my bank, and I am trying to go back to the using the primitive method of using cash. In fact, if you ask my suggestion, I’d say: use cash and no card at all and then you’ll begin to value money.

Don’t close the credit card account even if you have paid the balance in full. It may leave a negative effect on your credit history. Never even think about closing it if you have an unpaid balance; if you close it, you actually close the path to negotiate the APR later. I stashed my credit cards somewhere I can’t easily find. A better idea: hide it inside two blocks of ice and keep it inside your refrigerator.

Sometimes, balance transfer is a better option. I transferred about seven thousand to a card which was offering a 1.99% APR for balance transfer for one year. Before a balance transfer, always consider the hidden charges (e.g. transfer fees which may be as high as 5% of the balance transferred) and the APR after the promotional period ends, and make sure you won’t end up paying more! Even if you don’t find that the total amount that you have to pay after the transfer is not significantly less than that if you did not do the transfer at all, you should give it a second thought because this way (by a balance transfer) you can aggregate all the balance in a single account.

What’s after that?

The last thing I want to do after I’m debt free is burden myself with another debt. I have gotten myself used to a frugal life. I have realized that I don’t need a lot of things to be happy. I’ll definitely save for future big ticket items (and not put them in my credit card), and try to pay by cash as much as I can before burdening myself with another loan (like home or car loans). Next year, I’ll plunge into the market of investment. I’m just making my grounds now. But no more game with the credit cards!