Self Employed or Bust

Managing Debt by Eliminating Store Credit Cards

October 3, 2008 – 1:15 am

If the current economic crisis has taught Americans anything it should be that there are pitfalls associated with debt. In my previous post titled 1 Proven Strategy to Ensure You’ll Never Be Rich, I mentioned that failure to manage your personal debt will virtually ensure your inability to manage debt in your self employed venture and promised we’d soon talk about ways in which you could get started.

At the heart of our current economic crisis is credit. Poor lending, ill-advised borrowing and unwise debt management have left companies challenged to secure loans for such things as expansion or even payroll. Folks… PAYROLL!? Don’t you think you should be a little bit shocked that the companies for which we work have to borrow money to pay us for the work we’re doing? Don’t you think the work we do should result in profits from which we’re paid? Does this sound like wise money management to you? But I digress.

Now conventional wisdom will have you believe that debt isn’t necessarily a bad thing. After all, they’ll tell you, if you haven’t held debt, you haven’t gained credit and, by extension, will be hard pressed to get loans in the future. Ask any average first-time credit card owner if they got the best possible rate with the highest possible credit line. Odds are they were handed a starter package with painful interest and a low line of credit. But the statement is valid. A credit history (preferably positive) is practically essential in this country.

My problem with building credit is that there are so many incentives to just go out and do it without any real education afforded the public on what to watch out for. You are told debt is a good thing. It’s pushed day in and day out. Get a mortgage because you’ll get a tax break on the interest, they tell us! And we fall for it even though this amounts to handing somebody a dollar, being handed back 30 cents and thinking you came out ahead! In so many ways, we’re sold debt without being handed a very much needed instruction manual on just what the upside and downside is. But my personal favorite is the department store or gas station credit card.

Go to a department store and they push their company credit card on you. “You’ll save 20% on today’s purchase,” they proclaim. You’ll earn points! You’ll earn rewards! You’ll earn, you’ll save, your hair will grow back, your foot odor problem will be cured, you’ll finally understand your husband and your children will love you! Ever stop to ask yourself the down side? Why is this complete stranger so darn desperate to provide you with the apparent plastic equivalent of the crown jewels with no apparent strings attached? I’ll tell you why.

For that one time 20% savings on your single purchase (let’s say it’s $100) you’ll only spend $80! But for the lifetime of that card, you’ll be handing that company hundreds or thousands of dollars more than what you thought you’d be paying for those future purchases.

Friends, those stores don’t love you. You may have charm and a winning smile, but there isn’t a gas station or department store so charmed by your charisma that they want to lose money on you. They are pushing those cards on you because they make HUGE PROFITS on the American habit of floating debt from one month to the next and on the hidden fees you’re probably paying just for the privilege of carrying that thing around.

Store credit cards cost you. The rates on these things are atronomical. They don’t save you a dime in the long run and it’s the long run those stores are banking on when they push you to apply for one of their cards. There are individuals out there who do fine with any kind of card. They may use a card for the convenience at the moment, then go straight home and cut a check to pay it off before that interest hits. But, trust me on this, people, most of us don’t do that.

So, this first post in our debt management series offers you one simple solution - NEVER EVER EVER EVER accept, register, apply or sign up for a store credit card. If you currently own any, get rid of them. Yes, you heard me, get rid of them. Gather them together, pay them off or consolidate them and pay them off. We’ll discuss consolidation in a future post.

But don’t you need a credit card? Yes, you should have a credit card because it is a simple and effective way to build a positive credit history but be rational. You don’t need 8 credit cards. You don’t need store credit cards. Carry one or two major credit cards with the lowest interest rate you can get, build a good credit history with them and that’s it.

And one last thing… if you are accumulating store credit cards because you are so cash strapped that it’s the only way to get what you need, stop. Really put on the brakes here. Falling deeper and deeper into credit card debt because you are hurting for money is applying the same logic as cutting deeper and deeper into a wound to get rid of infection but then never applying an antiseptic. The bigger wound gets infected again, you cut deeper again, it gets infected again and on and on.

Recognize that in such dire circumstances you have to STOP. Take a long, deep breath and accept where you are. Don’t hate yourself for it, just recognize that accumulating more debt is not a solution, it’s just compounding the problem. Once you’ve taken a deep breath it’s time to consider responsible options such as reprioritizing needs, eliminating expenses, consolidating debt and speaking to credit counselors. Nothing pains me more than the idea of a family strapped with debt sinking themselves deeper and deeper into a hole from which they are ill-equipped to escape.

There are many ways in which you can start down the path to more intelligent debt management to ensure you don’t sink yourself when you are self employed. The insane APR and uselessness of store credit cards makes this a no-brainer starting point. Next up we’ll talk about those major credit cards. Though your Visa or Mastercard is an improvement, poor debt management strategies here can be just as bad.

Stumble it!