This is a post by Kevin Yu, author of the DebtEye Blog.
It’s a great and liberating feeling after you made your final payment to your credit card company. Your hard work, persistence, and dedication finally paid off. Go ahead and celebrate and rejoice, but don’t get too comfortable. Getting rid of debt is only half the battle. The other half is knowing how to stay debt-free so you don’t follow the same road as before.
“Nearly all debtors stated that they had received offers for credit [cards] in the first months following their bankruptcy,”—Source.
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Credit card companies don’t like you if you pay off your balance in full each month; they like you because you’re considered a “revolver”. A revolver is someone who only pays the minimum payment and carries their balance over each month.
How do you stay debt free?
The first part of living a debt-free life is knowing how you got there in the first place. Let’s face it, accumulating debt doesn’t happen overnight. There was some reason why you started to accumulate debt in the first place. Here are the most typical reasons most people get into debt.
- Not enough savings: There comes a point in everyone’s lives where we’re faced with unexpected expenses. It can include medical expenses, car/home repairs, or even a friend or family who needs to borrow money. You should have at least six months of living expenses saved in case of emergencies. If you had an emergency fund, you wouldn’t need to charge it on your credit card, right?
- Keeping up with the Joneses: Having the best things in life is great. We’re living in an age where technology and innovation creates new “must-have” products. Your neighbor buys a new 3D TV, and you now feel the need to buy a bigger and better one. A friend buys the iPad2 while you’re still stuck with the original iPad. This is a habit you want to avoid at all costs. Do you ever hear about celebrities who file for bankruptcy? I wonder why.
- Poor money management: How many of us actually have a budget and stick with it? You must create a monthly budget and get in the habit of following it. However, I always recommend that everyone starts off with a monthly spending journal. A spending journal involves writing down every little expense (even the $0.25 pack of gum you buy). After a month, you’ll start to notice a trend and see where your money is going every month. From there on, you can now construct a realistic monthly budget and find where you can trim some of your expenses. Also, don’t forget to set aside 15% of your income towards savings!
Learn to use credit responsibly: become a “deadbeat”
A “deadbeat” is a term used in the credit industry to describe a consumer who pays off their balance in full each month. Creditors refer to you as a “deadbeat” because they don’t profit off of you compared to a “revolver”.
I’m not here to tell you to stop using credit cards forever. Using your credit card is important in establishing credit in case you’re making a big financial purchase. Without it, you have no creditworthiness.
But here are some tips on how to use credit responsibly.
- Have a small credit limit: There’s really no need to have a $2,000+ credit limit on your credit card. Having a higher credit limit only makes you feel that you have “free money” that you can pay off at any time. This is why credit card companies send letter saying that you’re eligible for a higher credit limit.
- Pay off your balance: This may sound like an obvious tip, but it’s surprising how many people carry balances. For example, if you have a $500 balance, you can tell yourself that you’ll pay off $400 and leave a $100 balance. Soon enough, this is going to develop into a habit. This is exactly what your credit card companies want. Have the discipline to pay off credit cards quickly before the due date!
- Gain reward points: If you decide to use your credit card for daily purchases (and of course pay it off every month), make sure you reconcile your transaction at least once a week. Make sure you’re keeping track of how much you’re spending every month in each expense category. This will ensure that you’re not “freely” using your credit card for unnecessary purchases.
Living a debt-free life involves learning to spend money wisely. If you can keep to a budget, set aside money towards your savings account every month, and pay off your credit card balances in full, then you’re well on your way to becoming a deadbeat!
Kevin is the author of the DebtEye blog. He is a certified credit counselor and used to own a credit counseling company in Chicago. He is also the co-founder of DebtEye, which is an online software to help people get out of debt.
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