We hear a lot about improving individuals’ credit card or debt management these days, but aren’t we really talking about improving the choices we make when shopping? The credit card is just a tool. Credit is neither good nor bad. People who end up with excessive credit card debt have either purchased too many goods or services, or purchased goods and services that were more expensive than they could afford.
Some of the financial gurus make it sound so easy: just get rid of your credit card debt and you will be fine. Debt is a reflection of past consumer behavior. While we are reducing our debt levels, it makes sense to take a look at changing our future patterns of consumption as well. And when we take a look at that, we can also take a look at how best to pay for things we buy, so we can enjoy life but also never build levels of debt that are unreasonable or pose a financial burden.
One thing we can do is redefine what is a necessity. There’s a big difference in using a credit card for an unforeseen medical expense, or when our car breaks down, versus using it for a trip to the Bahamas. A good portion of credit card debt accumulates when people fail to recognize the difference between things they must have and things they want. Credit is actually a great tool to help people pay for unforeseen bills that inevitably appear. In business these are called “extraordinary” items, and companies often tap into credit lines to take care of these as well.
As a thinking exercise, make a list of the things you would be able to pay for if your household income dropped 10%. Could you pay for all the basics? Food, shelter, clothing, medical care, transportation? If the answer is yes, and you still find yourself in debt, that means you have been spending a significant amount of your income on things you don’t really need or you have not been smart in shopping for the lowest cost goods and services that still satisfy your needs. For most of us, both of these situations are certainly the case. This means our financial situation is far from hopeless; we just need to adjust our thinking about satisfying what we need versus what we want, learn how to shop smarter, and take this new thinking into the future.
We all have to consume goods and services; it’s a basic fact of life. But we can change how we pay for them. The convenience of credit cards is irresistible. The credit card companies have made sure that we can use them everywhere. And that’s precisely how we build up high balances on the cards. With this simple technique, we can cut our credit card purchases by 2/3: For your next three purchases, use cash for one, your debit card for the second and make only the third purchase with your credit card. This means in order to make two of the purchases you have to make sure you have the funds available right now. It can also help you identify whether all three purchases are truly necessary. And it means you’re still out there shopping. You’re not depriving yourself of the things you really need.