Dealing with Credit Cards: Enjoy the Convenience and Preventing Traps

You were young, fabulous and just graduated. With a good degree you found a job that paid you more than you could imagined. Your father gave you a gold credit card as a symbol of recognising your independence and maturity. On your first pay cheque, you wondered how on earth you were going to spend this money. A while later you bought a car. And you met a girl who earned more than you. ;-) What did you get a year later?

I'd got credit card debts equivalent to two months of my salary.

It was many many years ago. I got out of the financial mess eventually. When I think back, I know I was lucky that I had the lesson early in my life.

Credit card is one of the greatest and one of the worst inventions for modern living. Use it wisely you get your convenience of free financing, free book keeping, free gifts, free emergency funds, free history records of credit worthiness, etc. Use it carelessly, you bankrupt.

I have been meaning to complete this credit card section. Viewing current economy and financial trend of easy credits, credit card debts has became one of the biggest personal finance issues for many households. The ultimate rule of using credit card is never, NEVER, utilise the financing beyond what is given free (the first 20 - 50 days from the day of your transaction depending on your statement date). This means we should pay off the entire outstanding balance of our credit cards statements. Then, enjoy the rest of the benefits come with your credit cards. ;-)

Many people manage their credit cards well through discipline, being organize and careful. Many who lack discipline, who are not really organize and who are probably down right careless (sounded like me) can manage their credit cards well too...with a change of paradigm on life and a simple automated personal system built around their financial transactions. The "automated personal system" refers to the way we transact with our credit cards, the way we pay our credit cards balance, the way we check our statements quickly and effortlessly, etc. It is NOT about using software, it is not about doing record keeping, it is not about scrooge yourself to death.

With such personal system around a person's financial affair, exercising discipline becomes easy, actually extremely easy. This section is about "how to" on managing and enjoying your credit cards, and life. If you had already in trouble, there will be a section on getting out of credit card debts too.

Preventing credit card debt mess
Good practices in credit card usage that you will never fall into credit card debt mess.
Part 1: Preventing credit card mess (1)
Part 2: Preventing credit card mess (2)
Part 3: Preventing credit card mess (3)

secrets-of-a-former-credit-card-thief: Personal Finance News from Yahoo! Finance

secrets-of-a-former-credit-card-thief: Personal Finance News from Yahoo! Finance

It is quite a scary story to read about how this former credit card thief managed to gather credit card information and personal ID. The methods revealed are still largely in use today by criminals.

"DeFelippi, 29, mostly made fake credit cards with real credit card information he bought online. "I would make fake IDs to go with them, and then I'd buy laptops or other expensive items in the store and sell them on eBay," he says. DeFelippi was also involved in several other kinds of scams, including phishing schemes that exploited AOL and PayPal customers. Committing credit card fraud is still "ridiculously easy to do," he says. "Anyone with a computer and $100 could start making money tomorrow." "

He answered a lot more questions that is really interesting and practical to know. Read it.

secrets-of-a-former-credit-card-thief: Personal Finance News from Yahoo! Finance

Reader Digest's ideas of using credit

In September 2005 issue, Reader's Digest suggested that we should not close credit accounts we no longer use.

"When lenders decide whether to extend credit, they look how much of your available credit you're already using - poetically called your utilisation ratio." It went on, "Let's say you have five credit cards, each with a $10,000 limit, and your total balance is $6,000. That gives you a utilisation ratio of 12% - not bad, in the eyes of lenders. But if you close four of your of those accounts, your ratio suddenly jumps to 60% - no good. 'You haven't borrowed an additional cent, but on paper it looks as if you're closer to being overextended,' says Craig Watts of Fair Isaac, the company that developed the credit rating system."

There are several issues here.

1. Technically, Reader's Digest is correct. By cutting down your credit cards and thus reducing your limit, your credit report will look worse. It is more difficult for you to get further credit.

2. The problem lies in the hidden messages. Just think,
a. Why do you need further personal credit, while you already have $50,000 credit card limit?
The article makes you accept this situation before putting forward their view. Unkwoningly we accept the situation that it is ok to have more personal credit lines.

b. $6,000 credit card balance, ouch! What on earth are you spending? The targeted readers of Reader's Digest is Asia middle class like you and me, thus, the example of $6,000 credit card balance is totally unacceptable as good financial practice.

You are either charging $6,000 for the month or having a $6,000 accumulated balance from previous months that you were unable to pay off. In either case, it is unacceptable.

The article basically makes you feel ok to have $6,000 credit card balance.

c. Under the credit rating system developed by Fair Isaac, a middle class with $6,000 credit card balance and $50,000 approved limit is more credit worthy than a middle class with $600 credit card balance who choose to have $2,000 credit card limit. This is the failure of its credit rating system, or the entire banking credit rating system. It is bizzare that we have to adjust for that.

d. Such credit rating system rates a person who don't require loan with lower credit worthiness than a person who needs loans and manages to get huge credit lines. It actually promotes a culture of borrowings.

I was very fond of Reader's Digest. It was many years ago when the world was still divided between West and East, democracy and communism, black and white, free world and iron curtain, good and evil, etc. Such black and white world ended in 1989.

Today, it allows advertorial like "Managing Your Money", that promotes financial products, openly giving so called "financial advices" in their advertisement.

Why three credit cards?

The three credit cards system is a powerful personal credit cards administration system.

1. Charge your fixed payments (i.e. handphone, insurance, utilities, subscriptions, Astro, etc.) to your 1st credit card.
2. Charge your ad hoc payments like shopping, eating out at restaurants, groceries, petrol, etc. to your 2nd credit card.
3. The 3rd card is for emergency.

The rule is, you only bring your 2nd and 3rd cards out. You always keep your first card in your drawer.

Why bother to use three credit cards?


1. Once your segregated the two types of expenses, i.e. fixed payment and daily ad hoc expenses, into separate credit cards, it is much easier to monitor your expenses.

You have separated your expenses into fixed expenses and discretionary expenses. You can just cut away your 2nd credit card and stop all your discretionary expenses at crunch time.

2. Credit cards companies are helping you to do a very neat accounting records of your fixed payments and day to day expenses. So that in a glance, you know how much is your monthly fixed commitments. It helps to control you from adding such monthly financial commitments.

3. The 3rd card provides a contingency credit needs, i.e. hospitalize, before you can get anything from your insurance company. It also serves as a back up card when a merchant could not process your 2nd card.

Three good reasons.

12 amazing action plans avoiding credit card debts mess...
Part 1: Preventing credit card mess (1)
Part 2: Preventing credit card mess (2)
Part 3: Preventing credit card mess (3)

A refined article of twelve action plans in preventing credit card mess published in EzineArticle.

Preventing Credit Card Mess

Our refined article on preventing credit card mess published in EzineArticles.

As Featured On Ezine Articles

Credit card debts problem is extremely common today. It is usually the first sign of longer term financial troubles. How to manage your credit cards so that you will never fall into credit card mess? There are four pillars in preventing credit card debts problem.

First pillar: Proper credit cards administration

One of the best practices in managing your credit cards is to segregate your credit card expenses into three credit cards based on your spending pattern. The first credit card should be used for such fixed payments like utilities, subscriptions, insurance, memberships, etc. The second credit card should be kept for day to day expenses like shopping, eating out at restaurants, groceries, petrol, etc. The third credit card is for emergency cases.

Every month you need to clear the entire balances of three credit cards. You should not just pay any amount above the minimum requirement. The moment you leave a small balance, it adds up to the next month’s balance. Remember that this is a preventive action plan.

Put the second credit card away if in any month you are unable to clear the entire balances of three credit cards. Stop using the second card until you manage to pay off the entire balances of your cards in one month. You will have to pay cash for purchase made during the month. Don’t use your third credit card, it is for emergency cases only.

If you are still unable to clear the entire balances of your credit cards every month even after you have put your second card away, you should then review your monthly fixed payments that are charged to your first credit card. Some expenses may not be crucial for quality living.

Second pillar: Budget, the magic number

You just need to know how much you can charge to your second credit card in a month. You really don’t have to take out your spreadsheets or accounting software unless you enjoy using them. The calculation should be simple and straightforward. The magic number is your take home net salary less your monthly fixed expenses, i.e. repayment of home loan, insurance, memberships, school fees, etc. This magic number does not show how much you can spend but it indicates your monthly spending limit. It is a mark to ensure that you are able to pay off your entire three credit cards balances in one month. Keep the magic number in mind every time you charge an expense to your second credit card.

You must have a repayment plan in mind for big items like renovations, furniture, overseas vacations, etc., before charging the expenses to your second credit card. Do you have fixed deposits elsewhere to pay off the credit card debts? Are you prepared to sell your shares to clear the balances? Have you arranged other borrowings to pay off the credit cards debts? If you don’t have the financial resources or other financing means, do not spend on such big items. It is the start of your financial troubles. You must remember that credit card debt is the most expensive consumer debt that you can get yourself into.

Third pillar: A different mindset

Live now.

"Live today" is not equal to "spend today". Mass media propagates the virtue of spending by equating it with "live now". "Carpe diem and you buy" is the message that drives a generation of debt-ridden middle class. The core of the action is to improve your spending effectiveness in bringing satisfaction. If you need to spend a lot in order to elevate your happiness or satisfaction to the level of an average person, you are highly ineffective. Find good things in life that require little spending. Live now, not spend now.

Practise procrastination in buying things. After a while when you cool down it probably doesn’t seem to matter whether you own it or not.

Fourth pillar: Quality lifestyles

Focus on quality of living and not on spending. Check your credit card statements and identify your killer spending habits. Find quality alternatives. The best coffee I had was not from coffee bars like Starbucks, Strudels, etc. but from a small air-conditioned Indian restaurant. The coffee is called Bru Coffee. If a trip to Tokyo is too expensive, why not consider Sydney or Hong Kong? Spend time reading with your children instead of partying all night.

If there are material things in life that you couldn't do without, even if it means being unable to pay off your cards this month or for the next few months, you will get into credit card problems sooner or later.

Income level has got nothing to do with debts problem. There are too many bankrupt high earners around for us to know this. It is about how you treat your money, as simple as this.

Practice the four pillars and let credit card problems be a thing of the past.

12 amazing action plans avoiding credit card debts mess...
Part 1: Preventing credit card mess (1)
Part 2: Preventing credit card mess (2)
Part 3: Preventing credit card mess (3)

Suze Orman on credit card mess

More resource on dealing with credit card mess. Check this out, "How to take control of your credit cards?" by Suze Orman at Yahoo Finance. Beside the guides explore the right hand side bar.

Paying your share purchases with credit card!

Hong Leong Bank & HLG Securities offer Mastercard credit card that allow their clients to settle share purchase via credit card. At first glance, it seems to be a revolutionary concept. Using credit card to pay for share purchase actually extends your settlement days from T+3 to as long as T+50 days!

On a closer look, the handling fee is 1.5% of the settlement value. So beside paying 0.6% normal brokerage charge, you will suffer another 1.5% for a financing period stretched from 20 to 50 days. (If the T+3 settlement day falls right after your credit card statement day, you will have 50 days before the due date of credit card payment. If the T+3 settlement day falls right before your credit card statement day, you will have 20 days before the payment dues.)

So, 1.5% for 20 days to 50 days. A quick calculation shows that the financing cost ranges between 11.0% (1.5%/50 x 365) to 27.4% (1.5%/20 x 365)! It is extremely expensive even compare to share margin financing which usually ranged between 5% to 12%.

If you have already used share margin financing or personal loan to pay for your trading activities, stick to it. This credit card deal is really not a good deal...

More about share margin financing...actually our view is that DON'T borrow money to invest.