Your money: Avoid credit card debt

Key Points

In the span of a single lifetime, credit cards have evolved from their birth in the 1950s as a simple convenience for restaurant diners to one of the most potent forces within the American economy.

Today, credit cards offer financially sophisticated business owners and consumers with convenience combined with a shrewd way to borrow money at no interest.

Credit card users who pay the full amount due on their bills each month are actually using someone else's money to finance their purchases over a 30-day interest-free period.

In short, for the people who know and understand the rules for the smart use of credit, those little plastic squares are profitable money management tools.

Financial disaster

According to one study, there are 140 million credit card holders in the United States holding 1.2 billion credit and retail cards. You are almost surely one of them.

Together, we Americans owe more than $800 billion in outstanding balances. The average family with credit cards owed a startling $8,500 at year-end 2006. New credit card purchases now stand at the mind-numbing figure of more than $1 trillion per year.

Interest charges at up to 18.5 percent on that average outstanding balance come to more than $1,400 per year - money that won't buy a single piece of equipment or make one rent or utility payment. What's worse, those figures are only averages.

Millions of consumers and small business owners have found themselves mired even deeper in a financial quagmire, with little or no hope of ever getting out unless they change their ways.

Even more frightening, it would seem that just about anyone is a potential victim.

Kathy McNally, Ph.D., vice president of the National Foundation for Credit Counseling, says, "Credit card debt is an equal opportunity problem. It crosses over all income levels, ages, races, geographic areas and educational levels."

Obviously, buy-it-now-and-worry-about-how-to-pay-for-it-later has become the prevailing philosophy for too many Americans. Almost without exception, those card users who are carrying huge outstanding balances are paying either the minimum amount due each month or some other partial payment - a practice that is an almost certain first step down the road to financial oblivion.

Still, credit cards in themselves are not harmful. In fact, used skillfully they can be an important financial plus for anyone willing to practice a few rules of self-discipline and common sense. Here are seven steps to help you use credit to your advantage:

Limit credit cards

The more credit cards you have in your wallet or purse, the more difficult it will be to keep an eye on your total debt. At the very most, allow yourself a maximum of four cards - two for business and two for personal use - fewer, if possible.

Use other people's money

Whenever possible, don't charge more than you can pay off in full when the bill arrives at the end of the month. When you pay the full balance on your bill each month, you are taking advantage of an interest-free loan from the card issuer. That's a huge financial advantage.

Paying less than the full balance on a monthly credit card bill is the first step on the road to oppressive interest charges and unmanageable debt. It is far wiser to postpone the purchase of a nonessential item than to risk joining the swelling ranks of credit card victims.