The shocking truth about credit cards

The truth about credit cards






A good friend on mine, Albert, wanted me to feature what I think of credit cards in the Philippines. His questions vary from why do Filipinos seem to be in love with credit cards to how credit cards work to how to get out of credit card debt. More importantly he asks, what are my personal experiences with credit cards.

Albert, here’s for you.

My story:
1 year into my regular employment, I began noticing my co-workers getting their credit card applications approved left and right. One girl actually purchased a new cellphone from it right away. One guy actually even told me that he knew of people “making money” from credit cards by overlapping bills and withdrawing from credit cards to settle payments.

Young, innocent and stupid as I was, I began envying these guys. Soon enough, I was applying for a card myself. 2 failed tries and a year after, there it was – my very 1st credit card. The initial CL (credit limit)? P20,000.
Fast-forward 10 years later:
I still have 1 credit card. It’s the same one that got approved 10 years ago. It’s from the same bank. And it’s still worth only P20,000. The unpaid balance to date? Somewhere around P2,000, including this year’s annual membership fee of P1,500.

I guess I was just lucky. Or just plain kuripot. I didn’t get too much tempted to use the credit card all these years. I remember using it for large purchases (appliances) when I got married, but completely paid it off in about a year. No, I didn’t know too much what the credit card trap meant. I wasn’t as well-informed as I am now. Like I said, I was just simply lucky.

Now here’s what I learned over the years:

Yes, you can live without credit cards.
Yes, credit cards will work for you only if you have the discipline to pay your loan off in equal installments.
No, there is no way you can make money out of credit cards. The interest rate is way too high for anyone to afford it.
No, it is not wise to have the biggest credit lines, or multiple cards. These are all temptations.
I remember one cozy night me and my wife were talking about credit cards. Our discussion ended with us both sighing “ The credit card is the devil”. Of course, it was just a metaphor. But you get the message.

And so I lecture today:

When in deep credit card, gather your wits together and start paying off. There is no way around it. None. Just set a portion of your income every month and pay directly to your bank.

Credit card companies DO NOT want you to pay big chunks. It’s a not-so-secret- secret: They need to make money from you paying off only your month’s interest. So do yourself a favor and stop being nice to them.

Stop collecting credit card accounts. I promise you, this habit will take you directly to the trap.

Maintain only 1 credit card. The one with the smallest interest rate.

Pay only for stuff your cash on hand will permit you to. Stay away from credit card points. These are temptations. Remember the devil metaphor?

So there.

Be wise, people.

Being informed is key.

Why get serious about financial planning?

Today, i'm featuring an article written by one of my favorite financial writers, Rokai Kolam.

Q1 2011 has just passed, and I thought it would be nice to remind readers once again of the importance of planning out one's finances. So here goes:

Financial Planning Crucial During Hard Times 
By : Rokai Kolam     

 " It’s essential for people to plan their finances well especially during these difficult times. Even though you are employed or you run your own business, it’s not ideal to be complacent. What matters most is being able to manage your finances and not go overbudget so as to avoid going into debt. 


Living within your means is the way to go today. There are temptations around from clothes, cars and jewelry to the latest electronic gadgets. For this reason, practicing self-discipline is the most important step to take to avoid falling into these temptations. This is where financial planning proves highly valuable. 


Financial planning refers to meeting one’s financial goals by balancing income and expenditure to gain sufficient savings for future use and for security against potential risks. The most common objectives are for building wealth, children’s education and retirement purposes. With the right attitude and determination, financial planning can be easily achieved by following some important steps. 


A financial planner will initially recommend assessing one’s situation and setting goals. During this stage, one has to start considering getting a life insurance coverage for himself and his family. For those employed, they can enjoy a group insurance through the company they’re working for. However, for independent contractors working at home or those who operate their own business, buying an insurance coverage is the right thing to do. 


Setting aside a certain amount each payday is an ideal attitude. For the newly hired professionals, starting this endeavor as early as possible or as soon as you get your first paycheck is vital. But it’s never too late to do this. 


Expenditure-wise, people whether singles or married couples should make a list of their monthly expenses if possible to determine the average budget they need and the extra amount they can still save for themselves and their families. 


Credit card use should also be assessed as this is sometimes the root cause of a person’s debt. Most often, when an individual possesses a number of credit cards, he or she feels confident of spending more because there’s no cash involved. In the long run, when this attitude continues and the monthly balances are not paid off on time, the credit card owner falls into debt. 


People finding it hard to cope with their financial problems should not hesitate to consult a financial planner if they feel hopeless. A financial advisor or financial consultant can provide the proper advice to people facing financial difficulties. With their vast knowledge and experience, they are adept in teaching people the ways to free themselves from debt and other financial burdens. What they stress at most times is to always stick with your plan to be successful in your financial planning endeavor."

There you go, people. What he's saying is actually what i've been trying to say out loud to you. It doesn't matter if you're in the US or in the Philippines. The trap is universal. (You might want to read my article about the trap here) Avoid it while you can.

While at it, look at ways and means to earn extra (Read about it here). Then save what you'll earn, then invest. (Read articles about saving and investing here)


Make that choice now, readers. The rest of your lives are in your hands.

Loans

I'm thinking of creating a directory of Financing Institutions available for the Filipinos.

Why? Because i personally believe that loans are not bad. We Filipinos must learn to disassociate loans from the normal lines of thoughts such as "utang na loob" or "pabigat".

Let me tell you a story I keep on telling to people afraid of taking out loans:

You see, I work for a financing company. And for over a decade now, i have seen people actually make good with their loans from us. Almost all our clients, actually. Of course we also have delinquents.

This is why  I do not discourage people from taking out loans.

You know what's bad? If he uses that loan to buy something which WILL NOT earn - like a cellphone, or a watch, or a TV set. Then he's in trouble.

On credit cards:
Image via Wikipedia
One of my staff is very enterprising. Do you know what she uses her credit cards with high credit limits for?  Strictly for BUSINESS only. How? Here:

With high, i mean up to P200k per card. She has friends who do not have credit cards but are so bent on  buying high end items such as new refrigerators, tvs. aircon, etc. So she offers that she uses her card to buy them the items, but she'll collect monthly from them. for principal, interest AND, check this out, a little patong (profit). Isn't that clever? That's making money out of plastic.

I haven't followed her footsteps, by the way. First, because i do not have credit limits that high (i get awed at how high credit limits credit card companies can actually afford to give middle-income earners nowadays). And i'm not much into usury.

But i must say, this is a smart way of making extra money. (By the way, have you been checking out my page about "earning extra"?. Click here)

So you see, as long as you use loans to make money, nothing is wrong with it. Investing is the name of the game. Saving money is not enough (read my post about what to do with money saved here). One needs to find ways to create money and build wealth.

Let's start looking at loans the positive way. The old way is not applicable anymore. The world has changed.

Information is key, people!

PS
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