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Preventing Credit Card Mess

Credit card debts problem is extremely common today. It is usually the first sign of longer term financial troubles. How to manage your credit cards so that you will never fall into credit card mess? There are four pillars in preventing credit card debts problem.

First pillar: Proper credit cards administration

One of the best practices in managing your credit cards is to segregate your credit card expenses into three credit cards based on your spending pattern. The first credit card should be used for such fixed payments like utilities, subscriptions, insurance, memberships, etc. The second credit card should be kept for day to day expenses like shopping, eating out at restaurants, groceries, petrol, etc. The third credit card is for emergency cases.

Every month you need to clear the entire balances of three credit cards. You should not just pay any amount above the minimum requirement. The moment you leave a small balance, it adds up to the next month's balance. Remember that this is a preventive action plan.

Put the second credit card away if in any month you are unable to clear the entire balances of three credit cards. Stop using the second card until you manage to pay off the entire balances of your cards in one month. You will have to pay cash for purchase made during the month. Don't use your third credit card, it is for emergency cases only.

If you are still unable to clear the entire balances of your credit cards every month even after you have put your second card away, you should then review your monthly fixed payments that are charged to your first credit card. Some expenses may not be crucial for quality living.

Second pillar: Budget, the magic number

You just need to know how much you can charge to your second credit card in a month. You really don't have to take out your spreadsheets or accounting software unless you enjoy using them. The calculation should be simple and straightforward. The magic number is your take home net salary less your monthly fixed expenses, i.e. repayment of home loan, insurance, memberships, school fees, etc. This magic number does not show how much you can spend but it indicates your monthly spending limit. It is a mark to ensure that you are able to pay off your entire three credit cards balances in one month. Keep the magic number in mind every time you charge an expense to your second credit card.

You must have a repayment plan in mind for big items like renovations, furniture, overseas vacations, etc., before charging the expenses to your second credit card. Do you have fixed deposits elsewhere to pay off the credit card debts? Are you prepared to sell your shares to clear the balances? Have you arranged other borrowings to pay off the credit cards debts? If you don't have the financial resources or other financing means, do not spend on such big items. It is the start of your financial troubles. You must remember that credit card debt is the most expensive consumer debt that you can get yourself into.

Third pillar: A different mindset

Live now.

"Live today" is not equal to "spend today". Mass media propagates the virtue of spending by equating it with "live now". "Carpe diem and you buy" is the message that drives a generation of debt-ridden middle class. The core of the action is to improve your spending effectiveness in bringing satisfaction. If you need to spend a lot in order to elevate your happiness or satisfaction to the level of an average person, you are highly ineffective. Find good things in life that require little spending. Live now, not spend now.

Practise procrastination in buying things. After a while when you cool down it probably doesn't seem to matter whether you own it or not.

Fourth pillar: Quality lifestyles

Focus on quality of living and not on spending. Check your credit card statements and identify your killer spending habits. Find quality alternatives. The best coffee I had was not from coffee bars like Starbucks, Strudels, etc. but from a small air-conditioned Indian restaurant. The coffee is called Bru Coffee. If a trip to Tokyo is too expensive, why not consider Sydney or Hong Kong? Spend time reading with your children instead of partying all night.

If there are material things in life that you couldn't do without, even if it means being unable to pay off your cards this month or for the next few months, you will get into credit card problems sooner or later.

Income level has got nothing to do with debts problem. There are too many bankrupt high earners around for us to know this. It is about how you treat your money, as simple as this.

Practice the four pillars and let credit card problems be a thing of the past.

Chong Chen Tong is an accountant by profession with more than 10 years experience in stockbroking and investment banking. He loves computers, writing, economics and finance passionately (in the exact order) and the combination of this four led to his weblog, Financial Planning Malaysia Dot Com. Check out the Financial Planning Malaysia's Directory here.

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