Wednesday | February 08, 2012
Eight Rules for Debt-Free Living (Part II)
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By
Hon. John C. Ninfo, II
4 February 2005
YOUNG MONEY asked Judge John Ninfo, founder of the Credit Abuse Resistance Education program,to list some simple credit management tips for young adults. This article is the second installment of a two part series featuring his eight rules for debt-free living. Click here to read Part I.
5. If you pay your credit card balance off on time every month, you can receive a free loan for between 30 and 50 days. However, if you carry a balance you will pay interest on everything that you charge from the moment that you charge it. If you do have a balance on your credit card, resolve to pay it off as quickly as possible, in no more than three months, remembering that what you should never do is miss a payment or pay only the minimum payment or less than the actual interest due.
If you pay only the minimum payments on a $1,000 balance, even if you don’t charge anything more, at 18% interest it will take you more than 12 years to pay off the balance and it will cost you an additional $1,115, so you will pay more than twice as much for what you charged. That is because you will be paying interest on interest that can accumulate very quickly. What could have been worth paying more than double for it?
Would you go on that $1,500 spring break trip to Cancun if you knew that it was going to end up costing you more than $3,000? Through its advertising, the credit card industry has been successful in making people focus on their “wants,” whether they can afford them or not, and then giving them permission to have what they “want,” “just buy it” because you can by using a credit card.
Then, by focusing people on the payment required to simply maintain their resulting debt, rather than on how difficult it would be to repay that debt within a reasonable time, the credit industry has relieved the consumer of the anxiety that otherwise comes with being in debt. “If I can afford the payment, I must be able to afford the debt.” How many times have I heard that? It is simply not true.
Affording debt is being able to borrow it and pay it back over a reasonable period of time with interest out of your disposable income, not by incurring more debt. So please, scrutinize all of that advertising. (This goes for car loans too. How much are you really paying for a car when you have a five- or seven-year loan?) What are the real messages they are giving you and the rest of the public? As a “deadbeat” I am offended by it. You should be too.
6. Don’t accept all of those solicitations to sign up for a credit card in order to get a free gift. Your ability to get credit in the future for the things that you will really want, like a car loan, a home mortgage or a business will be much more difficult if you have multiple credit card accounts and credit inquiries. Even if those accounts have no balance due on them, and even if you have never used the card, the credit issuer knows that they still represent the availability of credit, and that you could max them out the next day and suddenly be deeply in debt.
7. Overspending and living above your means with credit cards by buying things that you “want” but can’t afford, are habit-forming and ultimately for many it is addictive. Going on a “financial diet,” when hard times come or that high paying job doesn’t materialize after college, is much more difficult than a regular diet, and we all know how successful most people are with dieting.
8. Check out the CARE Program website in order to improve your Financial IQ. You will find the Credit Card Chronicles (written by college students), articles, links to other important financial websites, a recommended book list and other great materials, such as the “Real Cost of Credit” handout that contains many lessons, tactics and techniques to help you understand the disadvantages of living a credit card debt-filled life and how to avoid it.
A credit card debt-free life will improve your chances of getting the important credit at good rates you may want someday, for a home, car or business, educating your children, paying for your rising health care costs and retiring with dignity. These things may seem like they are a long way off, but now is the time to learn about and take control of your finances. With the deregulation of the credit industry, no one is looking out for you except you. Your credit is like your reputation, a good one will always help you, but once you have lost it, it is very hard to get it back.
© 2005 Credit Abuse Resistance Education
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