Posts Tagged ‘exercise self control’

Credit Calamities: Know Your Limits

Most Americans have been lured by banks and retailers into a “spend, spend, spend” mentality. As a result, when faced with an opportunity to make a purchase, the consumer’s question is not “Should I buy this?” but rather, “What is the fastest way for me to buy this?”  Banks and retailers are in business to make a profit, and their profits depend on consumers’ spending. So it only makes sense that they spend millions annually on advertising designed to make us what we often do not need and cannot afford.

In this third installment, we will look at ways to help you counter the banks’ and retailers’ campaigns to get you to part with your money and keep more of it for yourself.

Credit limit. Most credit cards have a spending limit, or credit line limit. Even though the credit card issuer doesn’t want you to charge more than that, they often approve the first few charges that put you over the limit.  And then they can charge you an over-limit fee that just adds to your debt.  Plus, going over the limit can trigger an interest rate increase not only on that card, but any other credit card you hold…even with different credit card companies. So keep an eye on your charges, and stop several hundred dollars short of your limit. Give your self “breathing room” to allow for interest charges, late fees (which you should not have once you sign-up for “auto pay” as we discussed last month), and charges that are applied to your card automatically that you may forget about, like newspaper and magazine subscriptions or cell phone and cable charges.

Budget limit. Just because your credit card company will allow you to charge, for example, up to $10,000 doesn’t mean that you can afford to make monthly payments on that much debt. So if you are struggling to keep up with your minimum payments on your current debt, do not make your financial situation worse by racking up more debt. Stop charging. Period. Some consumers take extra measures to protect themselves, like keeping their credit cards at home or even (as you may have seen on a popular television commercial) freezing them inside a block of ice. As long as you keep increasing your debt, you decrease the likelihood that you will pay off the debt in the near future, or ever.

Spending limit.  Do you have a personal “spending limit”?  A “spending limit” is a pre-determined amount, which could be as low as $50 or as much as $500, that you will not spend without a self-imposed waiting period. What might this look like in real life, and how could it be helpful?  Imagine that you stopped by a big box retailer and noticed a new DVD player on sale for fifty percent off. Your DVD player at home works, but a few times recently you noticed some minor problems with it. It costs $50 on sale, which happens to be your self-imposed “spending limit.” You remember that you promised yourself if you wanted to buy anything that cost $50 or more that you would wait a minimum of two days before taking action. Here’s what could happen in those two days:

  • You might discover that a $12 cleaning kit fixed the minor problems you had been having with your DVD player, and now you don’t need a new one at all.
  • If your DVD player does break, you might notice one on Craig’s List for less money that works just as well.
  • You might find a similar unit at a competitive retailer for less.
  • You might remember that you have a birthday coming up and decide to wait and use the money you normally receive from family members to pay cash for the DVD player. Yes, the fifty percent sale that you saw will be over by then, but in today’s economy, retailers will soon be offering another sale to encourage cautious consumers to part with their money.
  • You might decide that no matter how cheap the DVD player is, you need to save up cash to pay for it because you cannot afford to increase your credit card debt any further.  Even if you save your money and pay $65 cash a few weeks later, that is cheaper than paying $50 on credit card and taking months to pay it off. The added interest could easily turn that $50 DVD player into a $95 or $125 model over time.

Try it. See what can happen when you exercise self-control and fiscal restraint. Learn to say “no” to your impulse desires, or at least start saying “not today.” Self-imposed limits are never fun in the excitement of the moment when you want to buy. The sense of pride and accomplishment you will feel when you take control of your spending, instead of letting your spending control you, will be well worth it.