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Frugal living tip #4. January 26, 2009

Posted by ourfriendben in Ben Franklin, wit and wisdom.
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Silence Dogood here. It’s time to start the week with another frugal tip from Poor Richard’s Almanac, in the spirit of our hero and blog mentor, Benjamin Franklin.

This week, let’s talk about credit cards. We’ve all heard horror stories about credit-card debt, about college kids getting credit cards and running up $19,000 in charges in their very first semester away from home, then socking those bills to their parents, who are already paying the kids’ astronomical college expenses and are plunged into debt (and despair) themselves by this unexpected additional burden. We’ve also heard the advice to freeze your credit card in an ice cube so you won’t be tempted to use it. Surely common sense lies somewhere between these two extremes.

Our friend Ben and I learned a strong economic lesson from one of our favorite books, Helen and Scott Nearing’s Living the Good Life. In it, Helen Nearing said that she and Scott never bought anything unless they could pay cash for it. They made do or did without until they had the cash in hand, and so they lived debt-free. Needless to say, they owned no credit cards.

These days, credit cards are pretty much an economic necessity, especially if you make purchases online, and they’re useful when someone demands “two valid forms of ID, such as a driver’s license and a credit card.” But that doesn’t give us a license to kill (in this case, our savings account and credit rating).

I own exactly one credit card. It’s a major bank card and—I hope you’re sitting down now—it’s the same credit card I’ve had all my adult life, the only credit card I’ve ever owned. Not only that, it charges a whopping 18% interest rate. By now, you’re probably thinking I must be crazy, but I view that 18% as a curb on credit-card spending. I charge no more than I can pay off in full every month. Mind you, I’m far from perfect, or even particularly together, and there have been months I’ve had to carry a balance, and, worse still, months I forgot to pay the bill on time and got slapped with late fees. Ouch!!! But those blows to the billfold have helped me stay on track. Like the daughter in our Frugal Living Tip #1 whose father made her flush her late fee down the toilet as an object lesson, I might just as well have been flushing (or burning) that hard-earned money.

If you have more credit-card debt than you can pay off every month, it obviously makes more sense to find a card that charges the lowest possible interest rate, and then pay as much as you can every month rather than just making minimum payments. It’s amazing how interest doubles, triples, or worse the perceived cost of something, especially if it’s a sizeable amount.

When our friend Ben and I bought our cottage home, Hawk’s Haven, we put everything we could into the downpayment and took out a 15-year mortgage to pay the rest, even though the higher monthly payments over a 30-year mortgage meant that we had to cut back in other areas (such as cars and vacations). We had read that you could substantially reduce both the time it took to pay off your mortgage and the amount of interest you’d otherwise be charged if you put even a little extra money against the principal every month, and we did that as often as we could. In 12 years, we paid off our house and saved ourselves three additional years of interest payments. Not only that, but now that times are tough and money is tight, it’s an incredible feeling not to have to think about coming up with mortgage money every month. This also holds true for credit cards. Pay as much as you can, and pay them off as fast as you can.

Another reason why it’s a great idea to cut back to a single credit card is that it means you’ll only have one credit-card bill every month. It’s a lot easier to keep track of one bill, and when it’s due, than bazillion, and it’s also easier to see what you paid for and what they’re charging you. I agree with the experts who tell you to pay off the smaller credit-card debts first, while making payments on the other cards, then closing each smaller account as you pay it off. Simplify, simplify. 

Speaking of seeing what you paid for, I’ll end with this wonderful home truth from Cheap Talk with the Frugal Friends (by Angie Zalewski and Deana Ricks, Starburst Publishers, 2001): “Face up to the debt you already have. Total up what you owe on store cards, gas cards, bank cards, and layaways. This can be difficult—and scary…. Calculate how much you owe, to whom, and at what interest rate. Write it down! Knowledge is power and once you know your financial standing you can begin to make positive changes.”

Your turn. Please share your debt-defying tactics with us!

           ‘Til next time,

                     Silence

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Comments»

1. My Mother's Garden - January 26, 2009

Great simple living tips to make living easier!

Thanks!

2. jodi - January 26, 2009

I don’t have a credit card at all; just a card that acts exactly like one but pulls funds directly out of my chequeing account at our credit union. Easy peasy. I don’t spend money I don’t have, but I can book flights, pay bills over the phone, etc etc. And last year, I turned in the points I had earned by using this card, and got a Kitchenaid mixer that we use all the time. So that was a little bonus. Actually, quite a nice bonus because I never would have justified spending 400+ dollars to buy one, and as I said we use it all the time; at least 4 times a week, to make bread etc. (we don’t buy bread from stores, except occasional speciality types from an artisan bakery).

Excellent point, Jodi, and wow, am I jealous of that Kitchenaid! We have those debit cards, too, but nobody around here offers you anything for using them (sob) …

3. Daphne Gould - January 26, 2009

I’ve always believed that too. I’ve had times when I had to count every penny and nothing I spent money on was frivolous. I still never went into debt (except the mortgage). We have lived in several different places. This one had a 15 year mortgage that was paid off early. I own only one credit card which is also in my husband’s name. The is a flaw with that which we found out recently. Someone had stolen my husbands info from somewhere and was using the card. It was a few days until we got a replacement. If my husband was on a business trip he would have had major issues.

Yikes, Daphne! That’s a very good point!!!

4. Jen - January 26, 2009

I went into shock when I heard that the average American family has something like $3000 credit card debt. No wonder our country is in such a mess. I like your strategy of sticking with 18% – I’d be scared to use it too!

I’ve read that it’s closer to $5-8,000 Jen! Yikes! How can people sleep at night?!!


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