Making credit cards work for you in a bad economy
Low interest rate, rewards cards can put cash back in your pocket
By Alan Klayman
Dear Maturing Loans,
I am in my 50s and the high cost of gasoline and food is making me spend more than I used to. I seem to be running up higher and higher credit card bills. What should I do to keep my retirement plans on the same course as they were before? Should I keep paying on my credit cards? -- Bill
You have a situation that many (if not all) are facing today: what to do about rising prices. You say you are concerned about running up your credit card bills, but you aren't sure if you should be paying them off, plus you are looking ahead to retirement. All of this is in the face of what you describe as rising food and energy prices.
There is no question that prices are way up. In some instances, prices are 100 percent to 200 percent higher than they were just a year or two ago. The first assumption you need to make is that prices are going to stay high. This way, if they go back down to levels we saw a year or so ago, then you have adequately planned for inflation. If prices do stay where they are, then you are going to have to address them right now. Put the numbers for today into your retirement income plans and adjust for them. This is going to take some work, but it needs to get done. To get started, look at your budgeting and your credit cards.
Your credit cards are providing short-term relief in meeting current expenses, but adequate budgeting is really what you need to do to conquer the high cost of your bills. Your credit cards can be part of this solution for you.
Looking at your current budget, you have to make sure you are meeting your expenses with your income. Covering these expenses with your credit cards worked in the very short term for you, but as you point out, you need a long-term solution. This may mean cutting back on some expenses, but it also may mean looking at cutting unnecessary expenses.
Let's focus on your credit cards. First, take a look at low interest and balance transfer cards, and compare what these different cards have to offer. You can save on one monthly bill alone by cutting interest expenses. For example, if your current credit card interest expense is $100 a month with an 18.99 percent APR, and you move to a lower interest card at 9.99 percent, your interest cost might move down by $50 a month. This $50 can be used to fill up one more tank of gas, pay for some groceries or even smarter, lower your credit card balance.
The less you pay in interest and the more you pay in principal, the quicker the balance can drop to zero, and this frees up even more money every month for you. Some people like to split the difference. For example, if you move to a lower interest card and are saving $50 a month in interest costs, then take down an additional $25 in principal from the card and give yourself $25 to cover expenses.
It all comes back to budgeting and being smart about your expenses. Buying grocery items per unit price is very important when budgeting. For example, by comparing unit prices in the grocery, you can see how much something costs per 100 items or per pound and buy the one that is less expensive. Just be careful with unit pricing with perishables as some could spoil. A good strategy is to buy in bulk with lower unit prices at places like Sam's or Costco or even your local grocery or discount store.
Budget for buying in bulk and charge it all on your credit card, but make sure you pay off these purchases on your credit card at the end of the month. The benefit? You get the added protection the credit card gives you, plus accumulating any credit cards rewards points. Using a rewards card wisely can buy you back-to-school supplies, a free movie night, going out to dinner, a tank of gas or things you need around the house. Compare rewards cards and check out the ease of getting rewards. Every extra reward you get is less money you spend out of your pocket, less money charged to a card and less interest paid. If you get $100 in rewards, you save $100 from your own pocket. For some, that $100 equals a $250 swing; $100 you didn't spend plus $100 you received plus $50 in taxes you would have had to earn to make $200.
Thanks for the question, see you back here next week.
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Published: July 23, 2008
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