Carren's Pitch

Life by Design

5/31/2009

Credit Yourself

Posted by Carren Jao Pineda |

I've always viewed myself as pretty practical, but having a credit card does make spending so much more easier. Writing this article just emphasized how extra careful we all must be when making a place for these innocent-looking plastic cards in our wallet.
~*C

Text by: Carren Jao
Edited by: Lacar Casanova, MEGA Associate Editor
Published: MEGA May 2009

While acquiring a credit card is relatively straightforward, handling credit card debt can be more complex. If you find yourself sinking fast, here are six steps to manage—and clear out—your credit card debt and be financially afloat.

Though unforeseen situations like medical emergencies can perpetrate heavy debt, poor financial planning and uncontrolled spending habits are more often the culprits behind it. A study by New York University Professor Priya Raghubir and University of Maryland Associate Professor Joydeep Srivastava entitled, “Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior,” shows that people using credit cards often purchase more and underestimate the cost versus people who pay in cash. These researchers say using less transparent means of payment such as credit cards lessens the “pain of paying,” reducing the psychological barrier to spend. The phenomenon is very apparent especially when credit card holders suddenly find themselves mired in debt they have unconsciously incurred.

If you’re on of the many drowning in credit card bills, the key to debt-free nirvana is found in these steps:

Step 1: Prioritize.
If you’re juggling several credit cards, internationally acclaimed financial guru Suze Orman advises to begin by figuring out the highest amount you could afford to pay toward your debt each month. On payday, always set aside this amount. Take stock of all your cards’ minimum payments and the money you set aside to pay these. The remaining money should go into the debt with the highest interest. Once you’ve paid off that debt, move on to the next highest interest debt until you have cleared all your cards.

Step 2: Promptly pay the right amount.
Johanna Garcia, Hong Kong Shanghai Bank’s (HSBC) Vice President for Group Communication advises, “Try to pay more than the minimum amount due every month, and make sure you do it promptly. This will help you avoid penalties and increased finance charges, as well as help you maintain your good credit record.”

Johanna adds, “Find out the what the charges are, how and when they charged and how they are computed.” Though the exercise can probably strain the non-mathematically inclined, taking the time to do so might just save your pocket from unnecessary bleeding.

Step 3: Advance with caution.
“Use your cash advance sparingly,” cautions Johanna. Many Filipinos use cash advances to pay off existing loans and top-up their salary. Johanna explains, “[The practice] can be expensive; you are charged a fee per cash advance transaction and, in most cases, charged the moment you make the cash advance.”
Step 4: Go for low
In an Inquirer.net article, registered financial planner Augustus J.V. Ferreria suggests to borrow money from Social Security System (SSS) or Government Service Insurance System (GSIS) to help pay off your credit card debt. Both institutions give out salary loans with low interest rates.

Step 5: Assess your financial goals
While we can all understand the instant sense of gratification and power involved in making a purchase, wht we should all realize is that true power lies in mastery of the self. Ateneo professor and practicing clinical psychologist Dr. Karina Galang Fernandez, PhD reminds cardholders, “[You have] to choose what’s important to you in life… as a parent, as a spouse, as an individual. [You have] to clarify what’s important and live accordingly.”

Make clear, quantifiable financial goals. Compute how much you actually spend on regular necessities (e.g. food, utilities) and how much of your hard-earned cash is left after bills (including your credit card bill, of course) and daily expenses (e.g. gas or transportation). Once you determine this amount, decide how much of it you can afford for leisurely spending. Knowing the actual amount you can spend on shopping, for instance, will help control impulse buys (especially when that pair of Manolo Blahnik shoes you’ve been eyeing since last season is on sale). Be sure, though to save a little for a rainy day.

Step 6: Don’t bite into that apple!
Credit card companies can be quite the tempters. In many instances, if you’re credit limit is already maxed out, your credit card company will either increase the limit or send you a new and pre-approved credit card (all it needs I your signature on the back). “My sister has four credit cards because her bank just keep sending her new ones even though she didn’t apply for additional cards, “shares MEGA associate editor Lacar Casanova. When this happens, don’t give in to temptation. Don’t think you were given more money to spend; think instead that your debt could grow even bigger. Of course, there will be emergencies (life-threatening ones and not the “oh my God, what am I going to wear on my first date” kind) and a credit card with a sizeable limit can be a lifesaver. But until you have a real need for it, ditch the card and go old school: use cash.

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