Are We Too Entangled in Our Plastic Safety Net?

The following post comes from the Military Saves Blog. Follow them on Facebook and Twitter.

June 27, 2012
By Lila Quintiliani AFC, Military Saves Assistant Coordinator

Have you ever found yourself in the grocery store a day or two before pay day with a full basket of groceries but a low balance in your bank account?  So you pull out your credit card to pay, hoping that by the time you get your next statement, you’ll have the money to pay, or at least pay the minimum?   Do you routinely pay only the minimums on your credit cards?  Do you take cash advances to pay your rent or your auto insurance?

If so, then you are not alone.  A recent survey by the nonprofit group Demos showed that 45% of families with annual incomes under $50,000 are relying on their credit cards to pay for basic needs such as rent, utilities, insurance and food.  And while the average credit card balance is down, from $9,887 in 2008 to $7,145 in 2012, this dip may be because many Americans have had their access to credit reduced or even taken away.

It’s true that paying with plastic is convenient.  I can’t tell you how grateful I was that pay at the pump gas stations existed when I had two babies in car seats and a deployed husband.  It’s also true that some credit cards have nifty rewards programs.  I was able to buy my mom a plane ticket so that she could see a sick relative because of the points I accrued with our card.  BUT if you are not treating your credit card more as a “charge card” and paying off the full balance every month, then you are starting down a slippery slope.

Depending on your interest rate, that $200 cart full of groceries could take you almost a year and a half to pay off (based on an 18% interest rate with a minimum payment of $15 per month.)  At the end of 15 months, you would have paid almost $25 in interest.  And that’s only one trip to the grocery store.  Add to that the trips to the gas station, the drive through and the big box retailer.  And if you took a cash advance to pay your cell phone bill, then it probably came with a higher interest rate.  And cash advances (unlike charges) have no grace period, so they start accruing interest right away.

Fortunately, there are some things you can do to prevent yourself from getting too caught up in the plastic safety net:

  • Start an emergency fund. If you don’t have one, building one should be your first order of business, even if it means you have to slow down on investing and saving for college.
  • Try to reduce debt, even if you are only putting down a few dollars more than the minimum on your credit cards.  Consider using the “snowball” method, where you put any extra money you have toward the debt with the highest interest rate.  After you pay off one debt, put the amount you were putting toward that payment toward the debt with the next highest rate and so on. But if you don’t already have an emergency fund, then you need to go back to step 1 before you aggressively tackle your debt.
  • Don’t accumulate new debt. Track your expenses for at least two weeks and figure out where you can cut back.  But be realistic – you may not be able to give up eating out altogether, but maybe you can eat out twice a month instead of several times a week.
  • Don’t close all your credit cards. If you do, your credit score will take a massive hit.  If you can’t keep yourself from pulling out the plastic every time you go shopping, take the cards out of your wallet.  Some people even freeze their cards in a block of ice so they aren’t easily accessible.  If you have to, you can even cut the cards up (without cancelling).

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