Manage Credit Cards

Understanding credit cards for credit card control

The credit card industry has reached the point where there is a problem. There is so much credit card debt because one of the most basic concepts of incurring debt has been forgotten. That is; How do you pay the credit card debt off? This debt often goes unpaid and grows for years. The interest rate on credit cards is high and compound interest works against those who carry unpaid balances as high interest rates are paid on interest already left unpaid. To understand how credit cards affect your personal finances look at how they affect your Budget, your Balance sheet and your Life Plan.

A Short History of Credit Cards

Credit cards were born to make retail transactions easier and safer. The key selling point for the consumer was convenience. For the vendor the credit card company guaranteed payment for the amount charged as long as the card used was not on a list of invalid credit cards circulated by the issuers. This was much easier and safer for the vendor than cash or checks. The banks who issued the cards made lots of money on the interest on credit card balances plus they charged the vendor a flat fee plus a 3% to 5% surcharge on all amounts paid to the vendor through credit cards. Vendors who accepted credit cards made more money because they had the most convenient tool for their customers to use in the market place.

Credit cards and your Household Budget

On your Personal Budget, Credit card spending is just that. It is spending on the spending side of your personal budget. No matter if it is the amount you have spent for the item purchased or the interest paid on items purchased in the past, credit card spending is pure spending. When you are calculating your budget surplus or shortfall at the end of the month the whole amount spent on credit cards at some time will need to be subtracted from your income to get your budget reading for the week/month/year/lifetime.

If you manage your credit cards properly you pay off the amount spent on credit cards each month. When you subtract this and all of your other spending from your income and still have a budget surplus that is great. If you have a budget shortfall, (you spent more than you earned) this is a problem on several levels.

First you will have to pay this shortfall from the income in your monthly budget sometime in the future. You have done what is called "kicking the can down the road". If you kick this can down the road every month, you add an item to the spending side of your budget...the interest payment. The second facet of this problem is that it is usually a high interest rate. From this particular item on your budget you get nothing other than you indulged in spending that you could not afford on your budget. You broke the number one rule of budgeting...You spent more than you earned and with this high interest rate it will get harder to spend less than you earn. If you do this every month you create the cycle of doom. Click the link and see if you are engaging in the cycle of doom.

If you engage in this kind of credit card management you are shooting yourself financially speaking not just on your budget but also your balance sheet.

Credit cards and your Household Balance Sheet

Credit cards are for consumer purchases. That means that when you make a purchase on your credit cards you incur a debt...that is a liability on your balance sheet. That is because what you buy has little or no resale value. It is not an asset but a consumable that makes no impression upon your balance sheet except as the liability that it has now become on your credit card balance. Your net worth is assets minus liabilities so it decreases every time you buy an item with your credit card. The only way that situation is resolved is when you pay off that item from the income on your budget. If you do not pay off that credit card balance and continue to charge other consumer items without paying them off of the balance on your credit card, you are then creating a larger and larger liability. That offsets gains or savings that you may be building on the asset side of your ledger from facets sides of your budget. You may still be saving but your net worth may be getting smaller or even negative if you carry large outstanding balances owed on your credit cards. Credit card balances owed are absolutely toxic for your balance sheet and are a form of financial suicide.

Credit Cards and your Life Plan

Your life plan is about defining what you want from life and then engaging in the proper behavior to get it. Credit cards are supposed to make life more convenient for us whether we are consumers or vendors. Using credit cards as personal loans is not consistent with managing your money or your life so that you get what you want. To use them as a source of borrowing is a drag on your budget and your balance sheet as we have shown. Charge only what you can afford to pay back from you next bi-weekly check or spread it out over your monthly budget as if it were a Payday loan.

Using credit cards as a loan eventually leads to financial hardship. It is like planning bankruptcy into your Life Plan. How do you avoid heading to Bankruptcy? Make a life plan that is consistent with not using credit cards as bank loans. Plan to make financial decisions that increase your budget surplus over time and increase your net worth over time. This will free you to accomplish the goals that you set in the other facets of your life.