I feel like I should almost start this lesson out with a tsk tsk, but that wouldn’t be fair to those who use the credit card so responsibly would it?  Now, since I am known in my social circle as the Debt Reduction Doctor, I figured it was only fair to share some of my views towards these credit cards with you, my loyal patients, to help everybody better understand the do’s and don’ts of credit cards.

Open-ended credit is available to anybody at anytime.  At any given moment, thanks to the marvels of the internet, you can instantly apply for thousands upon thousands of credit cards.  Now, almost every card is going to be different from the one before it.  Some have no annual fees and high interest rates, some have high annual fees and low interest rates!  Honestly folks, the credit card coaster is one that travels in outrageous patterns and hits all different cylinders.  The trick is to find the card that works best for your particular budget and way of life, and this is much more difficult than you might think.

When you apply for a certain credit card you are instantly given a credit limit.  Much of this depends on your credit history, but basically boils down to what the credit card companies are comfortable giving you to spend.  As you begin to use your card, responsibly of course, you must start making monthly payments on the balance of your card.  Your monthly payment is going to depend on how much money you owe, and will vary from month to month.   If you owe $200 one month your payment may only be $15, but if you increase that to $500 the following month you may be looking at a monthly payment of around $60.  Like I stated before, much of this depends on your interest rate and other details that are going to be different for every different card.  One quick side note, if you are using a card that utilizes the annual account fee you must also take that into consideration when marking out your payment plan.

There is no doubt that this form of credit is one of the most convenient ways to borrow, but it can come at a high cost.  If you overstep your boundaries and spend too much you may be looking at an unforgiving pit of minimum payments that barely cover the monthly interest rates. Trust me, this is not a good position to be in.

Another trick used by credit card companies to keep you trapped is their minimum payment.  As you pay off more and more of your debt the minimum payment is going to be reduced.  This may seem like good news, but it is actually the credit card company’s way to keep you in their clutches a little longer, squeezing more money out of you the entire time.  One way to avoid this vicious cycle is to continue to pay more than the required minimum when attempting to pay off an open-ended credit account.

While this is perhaps the most convenient form of debt, it has the potential to be very dangerous.  When used correctly it can be a very powerful ally, but when abused it can lead to frustration and financial nightmares for years to come.  If you are seeking a revolving credit account be wary, it can be your best friend or your harshest enemy, so spend wisely!

Over-exuberant use of a credit card often leads to trouble.  This is not exactly a little known fact, but something that must be stated again and again or else people will continue to fall into this similar pattern of despair.  Credit can be one of the best tools at your disposal, but it can also come at a very high cost.  It is apparent when people become addicted to the spending freedom that a credit card can provide, when in actuality it is not freedom at all, but actually a binding chain that tightens its grip with each passing month.  However, the way to keep the chains loose and your wallet comfortable is to spend wisely!  Now, wise spending doesn’t have to mean not spending, but it certainly does not entail outrageous impulse purchases or buying things you cannot afford.

If you want to start off on the intelligent track there are some things you must do before ever even spending a dollar on a credit card.  The first element is crucial, do your homework before you apply for a credit card!  Always take a close look at the terms of the card you are seeking, and be sure that you understand every aspect of this card.  You need to know what the annual fee is, what the interest rate is, and what sort of penalties you are facing if you fail to make a payment.  All of these things are going to play a major factor in your financial life once you start consistently using a credit card, so be sure to do your research beforehand.

Once you understand your card(s) and the different rates they offer, you will undoubtedly begin to use them.  It is important that you always know your current balance, however, or else you may overextend yourself.  Just as we have stated many times before, be responsible with your spending, and a large part of this depends greatly on how up to date you are with your current balance.  Never let it get out of hand or beyond reach, and if you begin to feel you are developing a spending problem with your card, get rid of it!  Always control the card, not the other way around.

The role of debt in your life is very often substantial, so it is always important that you take a wise and balanced approach to the world of credit.  Think of credit cards almost like a casino; they are built as a maze to keep you in and are always trying to entice you with new features and flashing lights, fancy advertisements everywhere trying to draw you in every moment of the day.  It is up to you to be able to withstand these temptations and look past the shallow joy that they are promoting.  A responsible credit card owner knows that credit cannot be used just for toys and fun, but as a tool that can make financial life more satisfying and less stressful.

One of the biggest ways for credit card companies to attract new users is with their rewards programs.  Some of them offer airline miles, others cash, but all of them are incentives for people to use their credit cards without concern.  It is easy to pull out the card and use it because in your mind you know that you are actually gaining by spending, and this is a dangerous mindset to have when you are facing credit card debt.  Adding a few free miles on your next vacation is certainly convenient, but you must be aware of the actual cost of these miles.

Any dedicated economist knows that nothing is free.  There is a cost for everything, even if they claim it is free. This is the approach you should take when you are seeking to earn credit card rewards.  You may earn airline miles or gift cards, but they certainly do not come without cost.  Every time you use your credit card for a purchase you are paying the price of that product plus whatever potential interest you accumulate due to lack of payment or other situations that arrive.  This means that the free miles you thought you were earning are actually increasing in price with every purchase you make, and the more you spend to earn rewards the more these rewards end up costing you in the long run.

It is very common for people to want to believe something instead of using their brain and thinking through a process clearly.  The reason companies’ use the word free so often is because of the positive connotation it gets from people who see it and become immediately intrigued.  The problem, however, is that nothing is free, and that you end up paying for your free items regardless.  Nobody understands that more than the ruthless credit card companies, who will constantly be looking for new ways to trap you in their web of interest and unpaid bills.

So, let us pretend that you sign up for a new card because the rewards program is absolutely stunning.  You can earn gift cards to your favorite restaurant, airline miles, or even cash.  This seems like such a stellar deal you can’t sign up fast enough, and once you receive your card you immediately start to spend.  You will certainly rack up a good deal of reward points if you use your card enough, but the real problem is the inflating number on your credit card statement.  You may earn yourself a $25 gift card to Olive Garden, but you are also quickly over a thousand dollars in debt and looking at months of interest payments just to get out from under the shadow of debt you have created.

Now, credit card incentives do not always have to be a terrible thing.  They can be helpful and a positive way of providing some advantages to using your credit card.  However, just like any other form of credit you must always be wary of these rewards and never over-extend yourself.  Spending too much to receive a reward is still spending too much, and you will be left in a much worse position than you were originally, even though your only incentive was to get a few airline miles that you thought were free.

The recently passed Credit Card Act goes into effect in just a few weeks, February 22 to be exact.  This new law will bring with it a dramatic shift to the world of credit cards, and as the Debt Reduction Doctor it is my job to make sure you are prepared for this upcoming shift.  The Credit Card Act is going to eliminate sudden interest rate increases and limit hefty fees that are currently causing credit card users stress and hair.  The new law also makes it much more difficult for just anybody to receive a credit card.  While this sounds drastic, when you consider that the screening process today is pretty much have a heartbeat get a credit card maybe a little tougher screening policy isn’t such a horrid idea.

The new law means that every credit card company must consider each applicant thoroughly before handing them the keys to the credit express.  The credit card companies must examine the applicants ability to pay off the loans they are given, and if they are deemed unable to do so then they will not be receiving the card they are seeking.  Life on easy street for credit card seekers is coming to an abrupt halt, and the future is apparently now.

Now, if you are unable to verify your income in a thorough and direct manner you may quickly find yourself without a credit card.  For most people this change won’t have a tremendous effect, but for others it may be somewhat concerning.  The people this new law is most likely going to affect the most are the unemployed and small businesses that use credit cards when they are in a pinch.  So with this new law there is the possibility that some small business owners will be unable to keep up the new demands of the law, leaving some of them out in the cold.

Most small businesses are struggling in this current economy as it is, and the new Credit Card Act is only going to compound their problems.  When the economy is struggling and less clientele is circulating amongst small businesses, they rely on credit cards to help them get by.  With this new law there is a chance that this safety-net luxury will be unavailable in the very near future.  If this becomes a well that small businesses can no longer drink from there may be a drastic reduction in the amount of successful small businesses we see.

Now, this is news that probably doesn’t apply to many of my everyday readers, but debt is already a serious concern for many small business owners in today’s market.  Being prepared for an upcoming shift in the credit card world is something that may be crucial to your business to survive.  Obviously not all will be able to withstand the sudden change in policy from the credit card companies, but with the proper research and preparation there is a good chance your business can be better prepared when the time comes.

In almost all my previous articles I have mentioned that it takes a long time to get out of severe credit card debt, but have never really given a consistent timeline to let you know exactly what you’re working with.  Well I did a little research and devised a plan that will let me make this timeline a little clearer for you out there in debt reduction land.  Now, obviously I am not going to tell you the exact day you will be out of debt, but I can at least give you a ballpark figure that will either discourage or encourage, hopefully the latter, you in your quest to become debt free.

Now, we are going to stick strictly to credit card debt for this scenario because as I have discussed earlier, installment debt usually gives you a clear look at the future and lets you know when and where you will pay off that particular loan.  With a credit card, or revolving door loan, paying off your debt is purely based on how much money you spend towards your account.

For starters let us put in a level of debt that is fairly high, but something that many people are facing right now.  If you are looking at a $10,000 credit card debt currently with a pretty standard interest rate, say around 18%, it will take nearly fifteen years to pay it off if you keep going making only the minimum payments.  If you choose this method you will also rack up nearly six thousand dollars in interest alone, meaning you will pay 160% of the money you originally borrowed back to the credit card company.  Now by simply doubling your minimum payment each month you are looking at only seven years and closer to two thousand dollars in total interest.  Obviously it pays to pay more than just the minimum payments in these sort of scenarios.

Now let’s say you are even deeper in debt than the first example, and are facing a credit card deficit of $25,000.  Paying only the minimum balance for eighteen years will get you out of this hole, with it obviously reducing in time by one half if you double the amount you pay each month.  Only making the minimum payments on this level of debt will have you paying almost $15,000 in interest alone by the time your debt is paid off, meaning you spent more money on interest than most people do on used cars.

In our final example we will look at a lot less severe level of debt, only five thousand dollars.  In the end you will end up paying only around three thousand dollars in debt, but that is almost eighty percent of your initial debt level.  Increase the amount of money you spend monthly and you can finish paying off this level of debt in five to six years rather than ten to twelve.  This is a drastic difference you are certain to appreciate.

Now the obvious message here is that paying only your minimum payments is going to result in a lot more money lost in the long run.  Sure it seems like you’re saving money now, but in actuality you are costing yourself big time down the road.  Now, you can take these three examples and find out about where you stand in this sort of situation in relation to your own level of debt and begin to plan accordingly.  This is a very useful tool when looking into your financial future, something that we should all be doing.