A Debt Management "expert" Who Doesn't Understand Credit Cards?

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On June 28, Fox News published an article by Clarky Davis, whom is said to be a “debt management expert and spokesperson for CareOne Debt Relief Services.”

Her article, titled “6 Mistakes to Avoid When Paying Off Debt”, lists six “typical mistakes consumers make when paying off their debt” in an attempt to become debt free.

I was shocked to read her third tip!

Here it is:

Making large monthly payments. When facing a large credit card balance, it’s tempting to make a big payment each month in order to see a significant decrease in your debt. However, your monthly payment needs to fit your budget so you can accommodate your other necessary expenses. If not, you’ll end up relying on your credit card to cover basic living expenses and you’ll be stuck in the cycle of making payments while racking up more debt at the same time. Always try to pay more than your monthly required minimum payment – double it if your budget allows — to begin making immediate headway in paying down your debt.”

Do you see the problems with her logic?

Let’s take a closer look:

1)  “When facing a large credit card balance, it’s tempting to make a big payment each month in order to see a significant decrease in your debt. However, your monthly payment needs to fit your budget so you can accommodate your other necessary expenses.”

It’s true that your actions need to allow you the ability to purchase unexpected, necessary expenses.

But why would the size of your credit card payment limit your ability to accommodate unexpected expenses?

Let’s say you have $1,100 cash, and your minimum credit card payment is $500.  Let’s say you expect expenses of $500, and so you pay down your credit card by $500, using almost all of your available cash.

Now, let’s say that necessary expenses turn out to be $1,000, not $500.  You don’t have the $500 in cash to pay for them.

What’s preventing you from using the credit card itself to purchase the extra $500 in items? 

Or, if the seller doesn’t accept credit cards, what’s to prevent you from writing a check drawn on your credit card account?  Or, if the seller doesn’t take checks, what’s to prevent you from doing a cash advance on your credit card in order to pay the seller with cash?

Sure, it’s possible that the seller won’t take credit cards, or the seller won’t take checks, or your credit card company won’t allow cash advances.  But it’s not very likely that all three options aren’t available!

You might think it would be an inconvenience to put yourself in a situation where you might have to do a cash advance or write a check.  Right?

Well, whether you consider the minimal inconvenience worth it depends on how much you value money!  

Let me explain the benefits of making the larger payments!

By making a credit card payment $500 greater than was necessary, you’ve saved the interest on $500.  At an annual interest rate of 18%, you’d save an easy $7.50 if it turned out that the unexpected $500 expenses occurred one month after you made the excess credit card payment.

And there are other benefits:  Because you made a larger credit card payment, your credit card company may view you as being a financially stronger customer, and may be more likely to raise your credit limit, given that they are more likely to feel you can handle the extra credit they provide.  

In addition, when the credit card company sees you make a much larger than necessary payment, it may become worried that you plan to pay off your credit card completely, thereby reducing their interest revenue on your account to zero!  In an attempt to ensure they keep your business, they may raise your credit limit, hoping you will have enough available credit to use your card for a purchase that you were previously unableto make (due to not having enough available credit).

In addition, when you use your credit card to purchase the unexpected $500 of expenses, many cards will offer you 1% cashback on the purchase!  That’s an extra $5 that you wouldn’t have gotten had you paid with cash put aside!

Also, by making the extra purchases with your card, you provide the credit card company extra revenue from the transaction fees they take from merchants (for example, they might charge merchants 1% of the price of the item being purchased, in exchange for providing the merchant with the convenience of offering credit card purchases to customers).  As a result, you’d be a more valuable customer to the credit card company!

The credit card purchases could also improve your credit usage profile in another manner.  By using your card for purchases, it could suggest that you feel you are in good enough financial shape to be able to pay off those purchases.  True, this isn’t always the case, but the scenario I outline is an improvement over the following scenario:  

Let’s say your finances are so weak, or your credit limit is so low, that you don’t normally make any credit card purchases at all.  Only payments.  Credit card companies might consider that to be a potential warning sign of financial distress.  But by making a larger payment on your card, it frees up your available credit so that you can begin making purchases again.  In turn, that makes you appear healthier financially, and might increase the odds of you receiving a raise of your credit limit, or being offered lower interest rates.

If it turns out that credit cards can’t be used to purchase the unexpected $500 expenses, you can often do a cash advance to get the money.  That advance might cost you, say, $2.50.  You’d still be ahead, because you pay a $2.50 fee in order to save the $7.50 in interest during the previous month!

2)  Let’s continue looking at the rest of her “tip”:

 “If not, you’ll end up relying on your credit card to cover basic living expenses…”

As I already explained, yes, you could end up using your credit card to cover the unexpected expenses.  But I’ve already shown that such use would likely benefit, not harm, you!

3)  “…and you’ll be stuck in the cycle of making payments while racking up more debt at the same time.”

Huh? How would you end up racking up more debt?  You’d be using the credit card to purchase items that were necessary, items that you would’ve purchased anyway had you instead used the cash that you put aside!  Using the credit card doesn’t result in an increase in debt at all!

Conclusion

Clarky Davis is dead wrong on this one!

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