How to Handle Credit Card Purchases
By Ric Edelman
Most of us use credit cards often. Although you write a check to “VISA” or “DISCOVER” or whatever, that obviously doesn’t reflect what you bought. Therefore, you must break down the invoice, itemizing the bill across the many categories you’ve established.
But what if you’re only making a minimum payment, or if you already had a balance, added to it, and now are making only a partial payment? It can get confusing, and here’s how to solve that problem: Go get a new credit card.
I want you to get a new card because I want you to stop using all your existing credit cards. By placing all your new charges on the new card, you’ll be able to track them each month. And make sure you pay off the balance in full every month. If you won’t be able to pay off the balance at the end of the month, you have no right to use the card now. Remember, a credit card is merely a way for you to use the bank’s money for 28 days instead of your own. If you can’t pay for an item with cash, then you can’t use the card, either.
By using the new card, you’re not using the old ones -- but you still have balances on them. That means you need a category called DEBT SERVICE. And as you make payments to those old cards, this is where you list the payment. This way, you can ignore what the money was used to buy. Those purchases are ancient history; all that matters now is paying off the debt.
Two Tricks to Help You Pay Off Your Cards Each Month
If you are concerned that you don’t have the discipline to pay off the balance in full each month, get a charge card, not a credit card. With a charge card, you do not pay interest. Instead, you MUST pay the full balance every month.
Here’s another trick that might help you pay off the balance each month: Every time you use your new credit card, immediately write a check payable to VISA (or whomever) for the amount you just charged. If you spend $35 at a store and put it on VISA, write a check for $35 to VISA right away. Then put the check in your drawer, and when the bill shows up, just slip the check into the envelope. You will have already recorded the check in your checking account, so the money is already there to cover the bill when it arrives.
If You Must Spend Cash
Sometimes spending cash is unavoidable, so if you must spend cash, get a receipt so you can remember what to record later. Just write “cash” in column one (like when you wrote a check to “VISA”) and itemize by category where the money went. Thus, if you withdraw $100 from the ATM machine, you’ll need to record what you spent that money on -- whether it was a pack of gum (FOOD), a parking meter (AUTO), beer with the gang after work (ENTERTAINMENT), or all three.
Two “Unexpected” Expenses You Must Expect
When I ask participants in my debt management seminars to list categories of spending, they’re real quick to offer food, shelter, clothing, transportation, education, travel, entertainment, and a few others. But there are two categories no one ever mentions, and I think this helps explain why you’re in debt.
Unexpected Expense #1: Repairs
When I see that people have credit card debts, I ask why. And they often reply with something to the effect of, “Well, the car broke down. It cost $800 to fix. As soon as I get out from under that, I’ll be okay.”
And they work real hard and they pay off $100 a month until they get rid of that bill, and guess what happens next? The roof leaks. Or their son falls on the playground and breaks his arm. Or the washing machine dies. Let’s face it: Life happens. Yet when things happen, people feel shocked, as though they didn’t know things happen.
If you think occurrences like these are unexpected, you’re deceiving yourself. Things are great until the car breaks down. Things are great except you owe $500 in taxes. Things are great until the basement floods. Things are great until the next thing happens. Time, a great physicist once said, is just one damn thing after another.
You just bounce from one crisis to another, like the guy who’s always losing 10 pounds. He loses 10 pounds but then it’s Thanksgiving. So in January he loses 10 pounds again, then it’s Easter. Afterward, he loses 10 pounds, and it’s Father’s Day. He loses 10 pounds and goes on vacation. It’s just a vicious circle, and we find our debt clients running round and round all the time. They’re constantly going from “I paid off my credit cards” to “I owe $2,000” because they don’t recognize that expenses in the UNEXPECTED category occur all the time. While it’s true we don’t know what the expense is, when it will occur, or how much it will cost, we should acknowledge that something will occur -- and it’s going to cost us money.
This is why you can’t track your expenses for just one month. You must do it for six months because you might go several months without an incident. And if you have a crisis that costs you several hundred dollars every four or five months -- and you do, as tracking your expenses will reveal for you -- you’ll learn that you must set aside enough money on a monthly basis to prepare for it. So set a new category for yourself called UNEXPECTED.
Unexpected Expense #2: Gifts
Haven’t you heard of Christmas or Hanukkah? Every December, people are overwhelmed by the money they spend on presents. Then they get to January and say, “Thank goodness that’s over,” and they spend the next six months paying off the bills. Come November, they get shocked all over again.
It’s easy to prepare for the costs of gift-giving: Just look at last January’s credit card bills and checkbook -- because you’re going to do it again this year!
And while we’re on the subject, does anybody you know have a birthday? If you’re not anticipating birthdays, anniversaries, graduations, confirmations, weddings, births, and other milestones in the lives of those you love, you’re just adding to the “repair bill crisis” that is certain to hit you.
After completing their six-month review, many people show me their results and lament all the money they spend on gifts. “But I’ve got no choice,” they say. “I’ve got a large family and we’re very close,” implying they are forced to spend hundreds or thousands of dollars every year.
Nonsense. If you are deep in debt, you have no business spending money you don’t have on gifts that people don’t need. You can bake cookies or rely on a hobby to make them a gift. Write a check to the American Cancer Society and tell the family that you’ve done so in their name.
Do you think I’m being cheap? Hey, I’m talking about survival here. If you were rich, yes, I’d say you were cheap. But since you’re broke, I’d say you are prudent. And if your family -- the people who know you best and love you most -- can’t support you in your efforts to improve yourself financially, then shame on them.
Have you ever heard the phrase “the rich get richer and the poor get poorer?” It’s true, because the rich keep doing the things that got them rich, while the poor keep doing the things that got them poor.
Indeed, being “poor” is a state of mind. But being “broke” is just a temporary financial condition. People who are poor stay poor; they won’t bother to read this book or seek to improve their lot in life. But you’re not poor, you’re just broke -- as evidenced by the fact that you are reading this chapter. And although you’re broke at the moment, that will change because of your desire and your effort.