Read The 9 Steps to Financial Freedom Online
Authors: Suze Orman
The 9 Steps to Financial Freedom (29 page)
In 2011, among prepaid debit cards that levied an ongoing monthly fee, that charge could be as high as $9.95 a month. Some cards with a lower monthly charge hit users with fees for various services, such as bill pay or using an ATM. In 2011, there were some prepaid debit cards that if you weren’t careful could end up costing you $50 a month. That is just crazy if you ask me.
One drawback of debit cards is that as of 2011 the three major credit bureaus do not track your payment history on a debit card. As I explained on
this page
, the information that the three major credit bureaus (Equifax, Experian, and TransUnion) collect is the basis for computing your FICO credit score. So as crazy as it is, debit card users are penalized because their payment history does not help them build a strong credit report. At my website, I have information for a low-fee prepaid debit card, The Approved Card, which is the first card that will share your
debit card transactions with one of the major credit bureaus, TransUnion. You can learn more at
suzeorman.com
and
theapprovedcard.com
.
If you can’t pay off your credit card debts right now, today, then you’re in credit card trouble, which can erode a solid financial foundation faster than anything. It’s true that if you’re in credit card trouble, you got yourself there, but it’s also true that the credit card companies worked as hard as they could to help you along. I’ve seen this happen so many times and I’ve seen the damage debt can cause. If you are in credit card trouble, you have to get out of it—and stay out by learning to avoid credit cards like the plague.
Debt feels like the heaviest burden of life. It weighs down your spirits, keeps your mind occupied with your burden, and makes you feel bound—because you are bound.
There are two kinds of debt, personal and institutional. Personal debt is money you owe to a family member, friend, or any other human being. Institutional debt is money you owe to a credit card company, a business, a school, the IRS, a bank, and so on. When debts start taking on a life of their own, and start growing faster than you can pay them, the weight of the debt drains everything—the money you’re saving for your future, your capacity to save and invest more, your ability to pay the debt as it keeps growing. My friends who are bankruptcy lawyers say that if your credit card debt is equal to your annual salary, you will never be able to get out of debt. You are in essence bankrupt.
When people start facing the truth about their finances, they’ll often say, “Well, I owe my brother $5,000, but what I’m really worried about is that I owe $8,000 on my credit card bills.” But I’ve seen money destroy personal relationships so many times, and I know what loaning money to, or borrowing money from, someone you care about can do to both of you. Remember:
People first, then money
. Personal debt is every bit as important as institutional debt, and I would much rather have a credit card company, with all its resources, tracking me down than watch as my best friend grew more and more resentful the longer I waited to pay her back the money she lent me in good faith and that is long overdue to her.
It’s this simple: Whether it’s personal or institutional debt or both, you must face your debt head-on. Otherwise the disrespect starts to take root in your soul. Even if you have permission from the person who loaned you money to take your time, it will still weigh heavily on your heart every time you think about it (which will be often) and fail to take action. It will be harder and harder to face people to whom you owe money in person. Remember:
Disrespect repels money
. Not paying your debts is a serious form of disrespect that makes it almost impossible to find new ways to create new money to pay off old debts. Not paying debts will not make them go away; instead, it will make your money vanish, and possibly your friendships, too.
CAN
GET POORER
This was a shocker to me, but the more people I started to see after I opened my practice, the more the numbers spoke for themselves. Most of the people who had major credit card debt were people you would consider affluent. It seemed as if
the more money they made, the more disrespect they had for their money.
My associate, Janet, did an informal survey in our area, and out of the sixty people we talked to, all leaders in the community, all of them carried credit card debt. How much debt? Only eleven had debt below $1,000. All the rest had debt ranging from $6,000 to $45,000. When we started asking around among these people if they thought others like them carried debt as well, they all guessed wrong. They would say, “Absolutely not.”
All these people made great money and were highly regarded in the community. Credit card debt is rarely created out of true need. It fills up, even if just for a moment, something else that is missing. If you hide it from others, as these people did, and believe you’re alone in your debt, you create a secret as burdensome as the debt itself.
Another scenario that plays itself out often is when one spouse or partner has to admit to the other that he or she is hiding debt, usually credit card debt, from the other. That secret Visa card with the growing balance. The department store bill on which you keep paying the minimum balance due, but that never seems to go down. The big check you wrote against your Optima card and haven’t been able to pay off. Cash advances here, cash advances there. You just sort of don’t tell your partner for a while, and then it’s too late to tell.
This terrible secret is a burden to you, if you’re carrying it, and it’s an unfair burden on your partner, who, if you share expenses together, is unconsciously also carrying the debt. Debts can’t be kept secret forever. I’ve had blowups in my office. More than once I’ve heard, “Oh, so that’s the secret. I
thought maybe you were having an affair.” Responses to the news vary. Some couples decide to deal with it together, some feel that the person who created the debt has to deal with it. But even if there’s a blowup, the result of letting that secret out is always a relationship that’s truer and more honest.
Please tell your partner if you’re hiding debt
. Your integrity and self-respect are more important than whether your partner gets mad at you. Get help if you need it. You’re not alone. Nonprofit credit counseling bureaus have been set up all over the country to help in cases just like yours; call one if you feel you need one. You can get out of debt. So many others have, and you can, too—and once you do, you’ll create so much more money, without being drained by your debt and your secrets.
THE FIFTH LAW OF FINANCIAL FREEDOM: You and Your Money Must Keep Good Company
In life we are very much influenced by the company we keep. If you have surrounded yourself with people who are healthy, eat well, exercise, and are well balanced, chances are good that you yourself live a vigorous and healthy life. If you surround yourself with people who drink, smoke, take drugs, and so on, I would venture to guess that your vitality level is not so high.
It works the same way with your money; the only way to keep it vital and make it grow is to keep it in a healthy environment. Credit card companies are never good company to keep, unless you’ve chosen one wisely, use it sparingly, for convenience, and pay it off in full every month, with only the rarest exceptions.
Being respectful of your money also means being respectful of those to whom you owe money, and being respectful to yourself also means getting out of debt—as fast and efficiently as possible.
CARYN’S STORY
Caryn tried everything to get out of debt. But the credit card companies kept winning.
Every time I start to make a dent on my credit cards, something happens, and boom, I’m right back charged to the max. It’s hard to move $15,000 of debt. For a while I was putting the odd $100 into a savings account and just paying off the minimum, but then I noticed that sometimes my finance charges were bigger than the amount I was putting away. So that was losing money. Before I save any more, I just want to get rid of this debt. It hasn’t helped that my back is bad again, making it hard to work. Since I couldn’t work, I decided to figure out everything there is to know about credit cards, all the fine print, and at least get the best deal I could. I had about five different cards, all with different interest rates, and I got obsessed—with getting a better rate, a bigger grace period, with all the new offers. I figured that some have to be better than others, right?
But it is hard to tell what’s the best deal. They charge every which way. One card sent me a bill saying, hey, you can skip this month’s payment. I thought they were doing me a big favor, but no. They charged interest on the money I should have paid. When the bill came the next month, it had grown by two finance charges. If I had known, I would have paid the money the first month. One time I thought I found a really good deal—5.9 percent.
Turned out it was 5.9 percent on the balances I had transferred, but much higher on cash advances and new purchases. I would have been better off staying with the company that charged me 9.9 percent on everything. Then there was that so-called grace period. I learned the hard way there, too. I thought that no matter what I bought I would have twenty-five days to pay it off before I was charged interest on it. I was out with a friend and she wanted to buy an anniversary gift for her parents—we were at an art fair and she saw this wonderful sculpture she wanted to buy for them. She didn’t have her credit card with her, so I said I’d use mine and she could write me a check and I’d just pay the bill when it came. Done. When I got the bill, I couldn’t believe it. They began charging me interest on that sculpture the day we bought it. But they had told me there was a grace period. When I called them up they said no grace period for me because I carry a balance. Only if I paid off the card every month could I have the grace period. Also, no grace period on cash advances; I found that out the hard way, too. Cash advances cost the highest interest rate, plus a fee on top of that—about 5 percent of the amount I withdrew just for withdrawing it. I hadn’t even thought of that. So I went back and checked. Already this year I had paid $220 in fees for cash advances.
I guess it’s all there, in small type, but who can figure it out? How do you get out of credit card debt?
There’s nothing like credit card debt to paralyze us. The sad part is that most of us don’t have a clue how the cards we have really work. When you were reading Caryn’s story, did you already know as much as she had found out about how the cards work? Probably not. The only thing most of us pay attention to is the interest rate they are charging us, and even then
some of us don’t take any action. Even though we know there are credit cards at lesser rates, we just don’t want to deal with it. Grace periods, average daily balances, the forms we might have to fill out … most people would rather keep paying 18 percent or more just so they don’t have to deal with it.
Throwing away hundreds of dollars in unnecessary interest payments every year is truly being disrespectful of your money. Caryn was so close to getting the formula right that I told her simply to keep obsessing about it—and acting on what she learned. She has, and little by little she is erasing her debt. She has also become something of a crusader and is starting a business creating a newsletter to keep people up-to-date on all the rates and scams: all she wishes she had known about before.
If you have a good credit history, credit cards will make it very easy for you to switch to the card they’re offering. Caryn had discovered that you can switch your balance to an account with a lower (much lower) interest rate with a few phone calls and five minutes of paperwork.
And continued vigilance.
Too-good-to-be-true offers are usually just that: too good to be true. Open and read every credit card offer you receive in the mail. Ask and answer for yourself all the questions that follow. It may be that you have to roll over your debt two or three times a year to get the best deals. That’s a few calls and fifteen minutes of paperwork a year, and it might save you literally hundreds of dollars. When can you stop being so vigilant? When your debt is gone and you’ve taken the steps to guarantee it won’t go back up again.
If you spend just a few minutes working on your debt as hard as you work on your job, you’ll at least create intelligent debt—debt at the lowest possible cost. You’ll also become aware of what you really owe, freeing up the paralysis you feel dealing with it. And with your knowledge, you’ll be facing your debt from a position of power, instead of one of weakness. The credit card companies are expecting you to behave a certain way—to be ignorant of the real costs of your debt and too lazy to change it. They want your money. You have got to want your money more than they do, or they’ll get it.
If you currently have a credit card or are considering a new card, here is what you need to know.
What Is the Minimum Percentage That Is Required to Be Paid Every Month?
The answer to this will vary from 1.5 percent of your balance to up to 4 percent. Here, for once, you want the figure to be higher, rather than lower, because the lower your required payment, as the credit card companies well know, the longer it will take you to pay off the debt.
In fact, it is essential that you pay more than the minimum each month. (We’ll talk about why later in this chapter.) But the higher the minimum is, the better.
What Is the Cash Advance Fee Charge, and What Interest Rate Applies to Cash Advances?