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Francisco Colayco

Credit card debt

July 22, 2008 5:53pm
When you want something very badly and don’t have the cash available, you might be tempted to use your credit card without any clear idea of how you will pay for your statement when it comes. Chances are, you will fall into the credit card debt trap. To help you strengthen your discipline not to fall into the temptation, it is good for you to understand what you will have to go through if you ever get into credit card debt. If you are already in credit card debt, then it will be good for you to take heed of the advice.

The highest interest rate charged for loans is the interest on credit cards. When you are not able to pay the complete amount in your statement, the amount due becomes a loan. Unfortunately, interest cannot be suspended and does not end until you pay off your loan completely. Interest rate of credit card loans is usually 3.5% per month. This is 42% per year when the usual loan interest rates are about 12-17% per year. To make matters worse, the amount you pay each month will be used to pay off the interest due on your outstanding balance first before even reducing the loan amount. This means that it is possible that you are paying mostly interest every month and hardly reducing your loan amount.

In addition, finance charges are based on the remaining balance due on the previous billing plus new transactions incurred from the current billing cycle. This means that the moment you get into credit card debt, you have to cancel your credit cards right away and use only cash. Write the company, cut the card and send it with the letter to the bank. Negotiate with your credit card company for a payment schedule with a lower interest rate and try to ask for penalties to be condoned.

For those in debt, if it took you some time to accumulate your credit card debt, it may take you even longer to get out of it especially if you do not start immediately. But do not despair. So many have your same problem but so many have been able to get out of it because of discipline and determination. Your addressing the problem now is a sure sign that you can do it.

For those who are happily not into any credit card debt, don’t even think that you should try it because anyway, you can get out of it eventually. I assure you that you do not want to create stress for yourself and to waste your time thinking of how you will do this. It is better to deprive yourself now of whatever it is that you want to buy. Save first to get the item rather than allow yourself to get into debt. Look at what you have to go through.

Start right away by “investing in debt”. Prepare a reduced spending plan (actually a savings plan) in writing with specific spending items to be reduced, which will be your source for paying your debt earlier. There should be clear timelines or deadlines to reduce your debt.

Save every peso possible to pay off your credit card bill. Respect each peso because it is the start to credit card freedom. Focus on savings first, concentrating on Needs and completely removing any Wants in your daily expenses. The next big move would be to look for additional income. It is important that you talk about these with your spouse and children so that they will be completely cooperative and disciplined enough to limit expenses to Needs. We talked about this in the June 20 blog.

The savings suggestions might sound difficult but you really have to seriously sacrifice until the credit cards debts are fully paid. You will be in bigger trouble if you don’t move very quickly. Remember, these are just the bitter medicines and if properly done, is really only temporary until you get all your plans together.

The only good reason you can borrow at this point is to consolidate all your credit card debts into one loan. You must, however, declare this to the company that is willing to lend you. Most of all, you must make sure that you will be paying less interest rate to this new lender compared to the interest rate incurred in your current credit card debt. You must look at all the hidden costs like service charges etc. Those are not immediately noticeable.

As the use of credit and debit cards becomes more widespread, more techniques for fraud will also be created. With the benefits come risks and costs. Major card issuers have come out with advisories on cards issued from developing countries with the Philippines among them. Recently, the major card issuers like Europe-Pay, Master Card and Visa have come out with more stringent standards on security features of credit cards to force the banks to take more serious steps in eliminating fraud.

Actually, you have the real responsibility for the security of your credit card. The credit card companies and banks can only do so much. I want to share with you tips that I have personally experienced and that have been relayed to me by others.

* Do not sign the back of your credit cards. Instead, put 'PHOTO ID REQUIRED.'
* Make sure the credit cards in your wallet are yours.
* When you to sign any receipt charged to your credit card, make sure you scratch the number off. Some establishments are using only the last four digits, but some of them are still putting all the information.
* Many people just take back the credit card without even looking at it, "assuming" that it is theirs. FOR YOUR OWN SAKE, DEVELOP THE HABIT OF CHECKING YOUR CREDIT CARD EACH TIME IT IS RETURNED TO YOU AFTER YOU USE IT!
* Cellular phones can take pictures of your credit card without your even knowing it. Whenever you are using your credit card be aware and notice who is standing near you and what they are doing when you use your card.
* Place the contents of your wallet on a photocopy machine. Copy both sides of each credit card. Keep the photocopy in a safe place. This way you have all of the account numbers and phone numbers to call to cancel. By the way, do this also for your passport, license etc.
* When you are writing checks to pay for your credit card Accounts, DO NOT put the complete account number on the 'For' line. Instead, just put the last four numbers. The credit card company knows the rest of the number, and anyone who might be handling your check as it passes through all the check processing channels won't have access to it.
* If your credit card is stolen, file a police report immediately in the jurisdiction where it was stolen. Remind the credit card company to place a fraud alert with the organizations who can trace especially through the internet.
* Generally, try not to use your credit card in the internet. There are so many ways for computer experts with bad intentions to make your life miserable. But sometimes, it cannot be helped because of expediency. Here are some tips to lessen your exposure:


1) You should be sure that the company you are dealing with is really reputable. It is better that you have visited their offices and checked out their credentials with the SEC and other government agencies related to their business.

2) Make sure that the website is really that of the company. Sometimes, websites use the name of other companies and you may not realize it. You can check this out when you visit/call the company yourself.

3) Reputable websites have safeguards for your credit card not to be intercepted by hackers. The warnings come out in the website telling you what procedures to follow and how you are protected. If there are no warnings and there are no safeguard notices and procedures, be wary. All the more you should take time to visit their offices.

4) Use only one credit card for internet purposes and review your statements very carefully. Keep a good record of the charges you make each time. You will not receive a copy of your charge slip like you do when you buy something regularly. You have to take extra effort to keep your records well.

5) Be aware that you must protect very especially the three numbers at the back of your credit card located beside your signature. Anybody can know your name and your credit card number but without these numbers, you cannot be charged by anyone.

6) If you get a charge that is not yours, you should alert the credit card company immediately. Sometimes the amount is small but they could just be testing you. Even if it is a hassle, you should report it. If you don’t, the next charge might be much bigger. The credit card company will ask you to pay for your entire bill even if you have a question. Otherwise, you will be charged for late payment penalties and fees, not only for the questionable amount but also on your future usage while the questionable amount is unpaid. When the credit card is able to verify that you are correct, they will reimburse the mistake and change your credit card number and card for free.


Another reminder: You must all understand the terms of your credit card even before you apply for it. When you receive the actual card, you must take time out to read the terms printed in the document that comes with the card even before you actually use it. If you still didn’t read it then, the terms are again printed behind each monthly statement that you receive. If you cannot understand the terms, you should ask them to explain the terms completely.

To own a credit card, you have to pay yearly. In many cases, the credit card company offers the first year charge free to entice you to take the card. But the next year charge is no longer free. You can pay in cash or you can use the points that you have accumulated from past purchases, if you have enough points. Each credit card has different ways of accumulating points so you have to ask them.

It can be interesting to manage your credit card and the points that they offer that give out nice gifts. Just be sure you pay on time so that you do not get into unwanted credit card debt.

Remember that you need to write info@colaycofoundation.com if you want me to answer your questions.


FRANCISCO J. COLAYCO is an entrepreneur, a venture developer and financial advisor. He has over 40 years of experience that covers service contracting in the Middle East, manufacturing, trading construction, shipbuilding, management consulting, banking and financial services. He is the Chairman of the Colayco Foundation for Education (CFE), a prime mover of the financial literacy movement. He joins our website blog to share with ordinary income earners, Overseas Filipino Workers (OFW) and students the simple principles to "Save what you earn and grow what you save."

CFE is the publisher of Mr. Colayco's bestsellers: Wealth Within Your Reach (2004 National Book Award for Business and Economics), Making Your Money Work (Nominated in 2005, National Book Awards Business and Economics), Pera Palaguin Workbook and Money for Kids. The books are available at National Bookstore, Powerbooks, Fully Booked and other bookstores or directly from CFE. CFE is also the producer of the PISOBILITIES DVD series, available at all SM record bars, Odyssey, Astrovision, Astroplus and other major audio-video stores nationwide.

CFE conducts talks, seminars, and workshops. Learn more about the advocacy at www.colaycofoundation.com or via email info@colaycofoundation.com, text +63917-8537333.
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